Tax reform was a key issue during the 2016 presidential election, and during his campaign, Donald Trump's tax plan inspired considerable debate. A full year after that initial proposal, the White House is still struggling to address tax reform in a comprehensive manner. Later today, the president will present the latest framework on the current version of his tax plan, but despite having had so long to work on the proposal, most expect several key questions to go unanswered.
How the Trump tax plan has changed over time
The White House discussed the tax plan during the first few months of the Trump presidency, and specific tax provisions had changed since the campaign. Changes to the tax bracket structure had reduced the lowest rate and raised the highest rate under the three-bracket system, and although the proposal doubled the standard deduction, that amount was still a bit less than what the pre-election tax plan had stated. Yet key components remained, including eliminating the estate tax and the Alternative Minimum Tax while providing for corporations to repatriate overseas profits at a preferential tax rate. Corporate taxes would fall to 15%, and pass-through business entities like partnerships would qualify for this lower rate as well.
The exact terms of the newest version of the Trump tax framework won't be certain until the president and his staff actually tells the American public what they are. Yet many news services have cited numerous sources when discussing what's likely to be in the latest proposal:
- A corporate tax rate reduction to 20%, with the potential for pass-through entities to have a slightly higher 25% rate.
- An increase of standard deductions to $12,000 for singles and $24,000 for joint filers, which would be slightly less than the doubled amounts previously anticipated.
- A three- or four-bracket rate structure, with the top rate falling to 35% and the lowest rate to come in at either 10% or 12%. Some have suggested that a high-income surcharge might be added to address concerns about the tax package unfairly benefiting top-earning taxpayers.
Those watching the policy debate closely are hoping for more details following initial speeches presenting the proposal. Yet many expect that even after the formal presentation of the tax plan, many uncertainties will still remain.
The long-term cost of tax reform
One fundamental question involved in the tax-reform debate is what impact the current tax plan will have on the federal debt. Proponents of the measure argue that even though lower rates would result in less tax revenue in the near term, greater growth in the tax base would make the measure revenue-neutral over time. That's almost certain to play out with any tax cut, because taxpayers already started taking steps at the end of 2016 to defer income into the current year in the hope that the Trump administration would be successful in implementing new rules for the 2017 tax year. That seems unlikely at this point, but even if tax reform doesn't take effect until 2018, taxpayers would likely be able to hold off on recognizing certain types of income like capital gains until then. Similarly, with trillions of dollars in offshore cash looking to take advantage of favorable repatriation provisions, corporations taking advantage of a tax holiday could add billions to the Treasury's coffers.
Beyond those near-term impacts, though, the success of the tax plan hinges on producing faster economic growth. Economists are mixed in their views of how much faster GDP can climb, but many doubt that the rise to 3% growth that Trump has predicted will be possible merely from tax-cut efforts. Without that growth, tax cuts are likely to cost the federal government revenue, expanding the national debt. Although some will be pleased at the idea of the government having to shrink, the more likely scenario would have government spending remaining at high levels, maddening fiscal conservatives who have found little support for deficit-cutting measures.
Details to come -- someday
The sluggish pace of developing a detailed tax plan is caused by a couple of factors. With many different domestic policy issues to tackle, including healthcare reform and immigration, taxes have largely taken a backseat until now. Also complicating matters is that it's easier to discuss tough topics like tax reform in broad brushstrokes on which it's easy for people to take a view. Getting into the weeds of carving out exactly what tax rates, brackets, credits, and deductions will remain available exposes policymakers to criticism from both sides.
Having more information about the Trump tax plan will be useful for those trying to plan their taxes, but it will be far from the last word you hear about the proposal. At this point, taxpayers should expect something close to the status quo for 2017, with the most likely outcome having any changes not taking effect until after the New Year.
The Motley Fool has a disclosure policy.