Although the true nature and effects of President-Elect Donald Trump’s reforms cannot be known until they are implemented, or at the very least, concretely and succinctly proposed, it is nevertheless important to remain mindful of the direction in which the President-Elect intends on steering the Country; heedfully keeping up to date on potential policy reforms, and thinking through how the plan can be implemented, all the while formulating constructive contingency plans.
IMMIGRATION POLICY REFORM
The President-Elect will most likely tackle and overturn the policy known as DACA, Deferred Action for Childhood Arrivals, and the similar and corresponding policy, DAPA, for undocumented parents of American citizens. Both policies were implemented by President Obama by Executive Action in 2012; and consequently, can easily be overturned.
Although the President-Elect has shied away from his tough stance on “all illegal immigrants” (now claiming to only go after those who have committed crimes), he has steadfastly maintained his position regarding overturning DACA, DAPA, and “catch and release” policies (not to detain immigrants while they wait for their cases to be processed).
Additionally, Mr. Trump has stated his desire to increase the number of U.S. Immigrant and Custom Enforcement agents in an effort to “immediately” move out or detain criminal aliens. However, it is unlikely that any of these potential policy changes will (i) take effect “immediately” and; (ii) result in mass deportations. For these reforms to be sustainably implemented, the Department of Homeland Security would need to have the proper funding, and/or infrastructure (which it currently does not) to deport and/or detain all the immigrants that are thought to be here illegally.
What is more, the lack of funding available to even begin to conceptualize how to implement these reforms makes the even more financially burdensome notion of the wall on the border of Mexico even less likely; not to mention the logistical complications that are certain to arise when erecting a barrier wall across the length of the border.
In brief, it is highly unlikely that our government will act in a way that would result in so drastic an effect that results would be seen “immediately”. On the contrary, it is likely the government will allow individuals who have at least started the immigration process to be grandfathered-in; honoring the immigration policies in place at the time the individual started the process to citizenship, even if there is significant immigration reform in the interim. Nonetheless, legal aliens are advised to maintain their legal status, and avoid any criminal infractions; considering that legal immigrants without any criminal records, who maintain their legal status are likely at the lowest risk of being impacted by future reforms.
The proposed Trump Plan aims at revising and updating both the individual and corporate tax codes. The President-Elect’s Treasury pick, Steve Mnuchin, has stated that the majority of the tax cuts will serve middle income individuals, stating that “only reductions in upper income taxes will be offset by less deduction, so that there will not be an absolute tax cut for the upper class.”
Individual Income Tax
The proposed Trump Plan will aim to reduce the current seven tax brackets, down to three brackets. The rates and breakpoints are as shown below. Low-income Americans will have an effective income tax rate of 0%.
Brackets & Rates for Married-Joint filers:
Less than $75,000: 12%
More than $75,000, but less than $225,000: 25%
More than $225,000: 33%
*Brackets for single filers are ½ of these amounts
The proposed Trump Plan will retain the existing capital gains rate structure (maximum rate of 20 percent) with tax brackets shown above. Carried interest will be taxed as ordinary income.
Under the proposed Trump Plan, the 3.8 percent Obamacare tax on investment income will be repealed, as will the alternative minimum tax.
The proposed Trump Plan intends on increasing the standard deduction for joint filers to $30,000.00, from $12,600.00, and the standard deduction for single filers will be $15,000.00. The personal exemptions will be eliminated as will the head-of-household filing status.
In addition, the proposed Plan will cap itemized deductions at $200,000.00 for Married-Joint filers or $100,000.00 for Single filers.
The proposed Plan will repeal the so-called “death tax,” or estate-tax. However, capital gains held until death, and valued at over $10 million will be subject to tax. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent, or the decedent’s relatives will be disallowed.
The proposed Trump Plan will attempt to lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business.
It will aim to provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent, payable over 10 years. The plan would attempt to eliminate most corporate tax expenditures, except for the Research and Development credit. Firms engaged in manufacturing in the United States would be able to elect to expense capital investments, and lose the deductibility of corporate interest expenses. An election once made could only be revoked within the first 3 years of the election; if revoked, returns relating to prior years would need to be amended to show the revised status. After 3 years, the election would be irrevocable.
Large reductions in the corporate rate, and the repeal of deferral would likely reduce the incentive for companies to recharacterize their domestic income as foreign-source to avoid U.S. tax. The lower corporate tax rate would also decease the incentive for a U.S. corporation to move its tax residence overseas.
Mr. Trump’s proposed tax reform plan has been thought to boost incentives to work, save, and invest, all while potentially simplifying the tax code. Additionally, by lowering the marginal tax rates and further limiting or repealing expenditures, it would likely reduce incentives and opportunities to engage in wasteful tax avoidance. The plan is thought to likely cut taxes on households at every income level. The fundamental concern with the plan, however, is that barring extraordinarily large cuts in government spending, the proposed plan would likely reduce the federal revenue based on taxed receipts in unsustainable portions.