President Trump proposed a new tax plan in the hopes corporate and personal tax cuts would induce national economic growth, while also bringing corporations and jobs back into the U.S.
Personal Income Tax:
The President’s proposed tax plan would reduce the number of tax brackets from seven to three. The plan is proposing a top tax rate of 35% (currently at 39.6%), 25%, and the lowest tax bracket of 10%. In addition, the proposal intends to double the standard deduction for married couples to $24,000.00.
However, these tax cuts will be coming at a price. The plan hopes to compensate any loss revenue resulting from the tax rate reductions by eliminating a majority of personal itemized deductions; keeping the mortgage interest relief and tax deduction for charitable donations and investments, while also eliminating the estate tax and the alternative minimum tax rate structure.
President Trump’s new tax plan proposes to reduce the top marginal tax rate from 35% - 15%, meaning the U.S. corporate tax rate would go from among one the highest in the developed world, to one of the lowest. Additionally, a low corporate tax rate would discourage multi-national corporations from shifting profits to low tax countries, and could help stimulate new investments.
Combining the proposed 15% corporate tax rate, along with the proposed top individual tax rate of 35% could create a powerful incentive for wealthy individuals to put away a large portion of their assets in a corporation. They would pay a 15% tax on profits versus 20% on capital gains and dividends or 37% on interest, rents, or royalties. If they hold their corporation until they die, they could transfer their assets tax-free to heirs, who could continue to accumulate lightly-taxed profits by simply keeping the assets in the corporation.
Under Trump’s campaign proposal, the 15% rate would also apply to partnerships and sole proprietorships, which would create additional avenues for avoidance without the inconvenience of incorporating.
By tying a 15% corporate rate to individual income tax reforms, he could limit corporate tax avoidance. It could reduce incentives for multinational tax avoidance and as well as disparities in taxation across firms.