2017-10-06 / View From Here


Tax policy in a difficult week

This is written in the aftermath of the tragedy in Las Vegas. We still need to know much more about what happened, and why. A column on this subject would have little useful to say. So I will simply express my horror and deep regret over the loss of completely innocent life.

I’m also not going to discuss the recovery efforts in Puerto Rico in the wake of Hurricane Maria. I do not have the expertise to evaluate the quality of the federal or local response to this disaster, especially as it relates to an island unreachable by stateside trucks with a less robust infrastructure. Obviously, everyone of good will supports a maximum effort to get a full recovery in Puerto Rico, with the power running.

Instead, I’ll turn to another important, if lower profile topic, President Trump’s new tax proposals set forth in a somewhat unspecific White House outline on September 29.

A key part of the proposal affects corporations, with a proposed lowering of the tax rate to 20 percent from 35 percent, a reduction that the President’s team believes will spur economic growth. The proposal also calls for a one-time repatriation to the United States (and taxation at relatively low rates) of income held abroad. The corporate tax cut, while expensive, has in the past had some bipartisan support (corporate tax rates are high by international standards), although it is not clear whether Mr. Trump will get (or seek) any Democratic votes in Congress.

With respect to the taxation of individuals, the proposed legislation calls for just three tax brackets – 12 percent, 25 percent and 35 percent, in place of the current seven. A key uncertainty in the proposal, however, is that it does not set forth the income ranges associated with each bracket. An additional upper income rate will be added to increase the progressivity of the rates. Also, the standard deduction would be raised considerably, which will result in both simplified returns and some tax relief for a considerable number of lower-bracket taxpayers.

Of considerable interest to local taxpayers, the proposal would eliminate a number of itemized deductions, including the deduction for state and local income and realty taxes and the deduction for miscellaneous expenses. Some important deductions will remain, including existing writeoffs for charitable contributions and mortgage interest.

On the other hand, the alternative minimum tax (AMT) would be eliminated. This is a significant simplification. Also, because state and local income and realty tax deductions are considered preference items for the AMT calculation, AMT elimination would lessen the effect for some taxpayers of the repeal of these deductions.

The estate tax and generation skipping taxes are slated for repeal. Very significantly there is no indication whether assets will continue to get a step-up in basis to fair market value at the time of death.

The business income of passthroughs such as partnerships, LLC’s and S corporations will be taxed at a flat rate of 25 percent. In light of the big loophole possibilities, steps will be taken to ensure that “personal income” (income that is equivalent to wages) cannot be recharacterized as business income.

Inevitably, of course, there will be significant changes in these items. The proposed elimination of the state and local tax deduction, in particular, has already come under heavy fire, even with the AMT relief. Quite possibly it will be replaced with reductions in the level of pretax deferrals to 401(k) plan, requiring some plan deferrals to be after-tax.

While Mr. Trump’s opponents will claim that the tax proposals favor the rich and swell budget deficits, the guess here is that, unlike the “hot button” health care proposals, much of the tax package will be enacted. Mr. Trump was largely elected because of the feeling that the economy had stalled, and that 2 percent annual growth is simply not enough. Many members of Congress and the public are willing to try a new, and hopefully more growth-oriented, approach.

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