What the new administration could do for tax law in 2017
The new administration has already begun to shake things up in the nation’s capitol. As of yet, however, the new president has not begun implementing much of his stated tax policy and related fiscal reforms. Precisely how the Trump tax plan will take shape remains to be seen, and is a topic of debate among economists, tax experts and the public.
The tax reform plan
The tax reform is outlined in bold terms: The heading of the official document online reads, “Tax reform that will make America great again.” At first glance, much of it seems roughly in line with recurring policy themes of trade protectionism and a desire to bolster a financially struggling middle class.
“Too few Americans are working, too many jobs have been shipped overseas, and too many middle class families cannot make ends meet,” the document reads. “This tax plan directly meets these challenges with four simple goals[...]”
Those goals, in order, boil down to reducing the tax burden on the middle class, simplifying the tax code, boosting the U.S. economy and achieving all of this without adding to the national debt.
The document goes into further detail by explaining more notable visions for tax reform:
- Single taxpayers earning less than $25,000 annually (or $50,000 filing jointly) “will not owe any income tax,” and would receive “a new one page form to send the IRS saying, ‘I win’.”
- Only four personal income tax brackets will be in effect, each a flat percentage of income: 0 percent, 10 percent, 20 percent and 25 percent.
- All taxes on business income will be 15 percent.
- The “death tax,” presumably the current limits on tax-free estate transfers, will be eliminated.
Analysis of the plan
Whether any specific part of the tax plan could be implemented would depend on a lengthy process of review and debate in Congress. However, several analysts have already made a number of projections about what the plan would look like in practice.
According to an analysis published by the Tax Foundation in September 2016, without any significant changes, the plan would substantially reduce income taxes paid while also reducing federal revenue.
- According to the Tax Foundation’s proprietary growth model, the tax proposed tax cuts would reduce federal revenue by at least $4.4 trillion. Accounting for the “larger economy and the broader tax base” leads to a revenue reduction of at least $2.6 trillion.
- Capital expenses would be much lower under the proposed plan, which would likely lead to faster growth in key measures like the gross domestic product and employee wages.
- While U.S. taxpayers as a whole would see after-tax income rise by about 0.8 percent, the tax plan would deliver 10.2 percent more income for the top 1 percent of earners, and potentially up to 16 percent more income for this demographic.
Officials heading the Federal Reserve appeared to concur with at least some of these findings, according to a New York Times report on the group’s most recent public meeting. Fed Chairwoman Janet Yellen, echoing the rest of the board’s consensus, said that recent economic indicators paint a promising environment for faster growth over the next several years. Yellen also noted that policies like those outlined in the tax plan would function as a fiscal stimulus, but was careful to note a need for caution.
On the one hand, Yellen and the Fed are of the opinion that tax cuts for a broad swath of Americans would allow the general economy to grow at a faster rate than recent GDP figures of less than 2 percent. But they did not see a case for a “boom” that some have promised. In fact, The New York Times reported Yellen expressed concern that such a stimulating act could increase inflation and force the Fed to raise benchmark interest rates at a faster pace. In December 2016, the Fed had voted to increase the federal funds rate for just the second time since before the last recession, and said it could realistically authorize as many as three more rate hikes in 2017.
“Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” according to minutes released from the Fed’s meeting.
Other analyses are more skeptical and openly critical the stated tax policy goals. Research from The Tax Policy Center published in October 2016 predicted the tax cuts would add $7.2 trillion to the federal budget deficit in the first 10 years, including borrowing costs.
Import taxes and other considerations
Everyone from small-business owners to the nation’s leading economic theorists have been working to understand the tax plan for the nation’s fiscal and monetary policy. This has only been complicated by several seemingly contradictory statements and remarks made by the President himself, as well as close advisors and friendly members of Congress, both during and after the campaign.
Another aspect of the tax policy is less certain: proposals to incentivize domestic production at the expense of international trade. The Trump administration and Republican members of Congress have supported various plans to impose a tax on goods imported from other countries, perhaps as high as 20 percent, according to Politico. Other ideas have included a proposal to impose higher taxes on businesses that move labor overseas.
Such a tax on imports would create a number of “winners and losers,” according to one New York Times report. The biggest, most certain opponents of the plan are among the retail and automotive industries, both of which rely on cheaper labor overseas to make goods that are then shipped and either sold (in the case of clothing) or used to assemble a product (in the case of automakers). Other major industries now built around outsourced international labor and permissive trade deals include the energy sector, chemical manufacturers, pharmaceutical companies and many others.
Piecing it together
It can be difficult to make sense of complicated matters such as tax policy without time to see it in action and study its effects. At the same time, businesses must do all they can to prepare for anticipated changes.
Some major institutions, including JP Morgan, have already begun placing bets on the actual outcome of the tax proposals and their net outcome on the economy. In the opinion of the bank’s analysts, much of the tax proposals will be voted down or significantly changed in the legislative process, and therefore will lead to growth numbers that are less than magnificent.
“[W]e think Congress will approve only a small portion of Trump’s tax and spending plans, and we have increased our expectations for annualized GDP growth by only 0.25%-pt beginning in mid-2017, and extending through mid-2019,” JP Morgan analysts wrote in a statement, according to AEI. The analysts further speculate that the protectionist trade policies that have been floated “could leave everyone worse off,” but viewed them as politically untenable and therefore not a major risk.
There’s also the pure reasoning that the reduction in federal revenue through broad tax cuts would have to be made up somehow. The only two possible solutions to that problem are either increased revenue from other sources, or vastly reduced government spending across the board. Both of these measures would require even more protracted debates on the floor of the U.S. Senate and House of Representatives.
In any event, many policy experts also point out that President Trump’s tax plans could require devoting his entire first term to the issue. And as with everything else related to economics, the real, measurable consequences of those reforms would take even longer to fully play out. That means U.S. tax professionals in any capacity must stay constantly up to date on these key trends as they develop, and use that knowledge to better serve their clients.