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The House Tax Cut Plan Could Fulfill Trump’s Objectives Of Reducing Taxes And Growing The U.S. Economy

ArmchairPolitiicianTaxCuts, November 2, 2017, by Brad Peery,
Blog site: www.ArmchairPolitician.US
Email: ArmchairPolitician.US@gmail.com

The tax reduction bill from the House has mostly delivered on the Trump tax plan. The corporate tax rate was reduced to 20% instead of the 15% Trump wanted, which makes U.S. corporations slightly lower than the 23% average of foreign corporations. This tax rate was made permanent. How this would work out with respect repatriating U.S. corporate profits that are offshore will remain to be seen, but it should be helpful. Whether there is a tax holiday for profits earned overseas also remains to be decided when a final bill emerges, after the Senate adopts its bill. Companies that are subchapter S corporations or limited liability companies, and the owners report income on their personal returns, will have a 25% tax rate. Both of these tax reductions should help in generating jobs and growing the economy at over a 3% growth rate. Also aiding corporations is the immediate expensing of new equipment purchases by U.S. businesses, and allowing small businesses to write off loan interest payments.

On the personal tax side, 401(k) plans and IRA plans, which are very popular retirement savings plans, were retained in their present form. The standard deduction was doubled from $12,000 to $24,000, as expected. In taxing wealthy, the Republicans bowed to the Democrats and kept the highest tax rate at 39.6%, for individuals over $500,000 per year, and married couples making over $1 million per year. With this change to the original plan, there are three additional tax brackets of 12%, 25% and 35%. The 12% bracket for the lowest income earners was increased from 10% in Trump’s recommended plan. The 12% tax bracket will apply up to $45,000 for individuals, and up to $90,000 for married couples. The 25% tax bracket will apply up to $200,000 for individuals and up to $260,000 for married couples. Above these levels, the 35% tax bracket applies up to $500,000 for individuals, and up to $1 million for married couples.

One of the most controversial changes will be to reduce mortgage tax reductions from a $1,000,000 mortgage, the current cap, to mortgages of $500,000. This will only apply to new mortgages.

Another controversial change was the elimination of tax deductibility for state income taxes. In 2016 the highest tax states were
• California 13.3%
• Oregon 9.9%
• Minnesota 9.85%
• Iowa 8.98%
• New Jersey 8.97%
• Vermont 8.95%
• District of Columbia 8.95%
• New York 8.82%

Also included was a limit of $10,000 being put on state and local property taxes. The alternative tax credit was repealed, but a new family tax credit was created. The so-called death tax or estate tax exemption has been doubled, and it will be repealed in 6 years, if the House version of the bill is adopted.

ArmchairPolitician Opinion
The House Tax Reduction Bill balances most of the tradeoffs between tax reduction, a simpler code, and tax deductions. The corporate changes were about as expected, and should be strong enough to make possible the Trump goal of 3% economic growth in 2018 and into the foreseeable future.

If there is a tax holiday for the foreign operations of U.S. businesses, that might bring back as much as $500 billion of cash sitting offshore in those companies. This would certainly provide new capital for U.S. domestic investment.

The individual tax revisions could substantially simplify the tax code, and make it much easier for individuals to do and file their own tax returns. The alternative minimum tax, if it is eliminated, will go a long way in making this happen. Additionally, individuals will have more money to spend on consumption, including durables

The unknowns are whether the tax reductions will stimulate inflation and economic growth, offsetting the initially reduced government taxes. Also uncertain is whether increased growth can eliminate to increased government deficits that might otherwise result.

We believe such a tax plan, as is proposed by the Republicans, has a good chance of being successful for taxpayers, U.S. corporations, and ultimately for the U.S. government.

See:
ArmchairPolitiicianTaxCuts, April 25, 2017, by Brad Peery,
The Outline of a Trump Tax Cut: Can It Be Revenue Neutral Over 10 Years?

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