Trump Tax Tinkering

Evidence based investment approach.

POTUS Donald Trump wants to over haul the current US tax system. Today US tax is a curate’s egg – partly good and partly bad. You have a mixture of high rates and generous exemptions which arguably can offset one another.

The Republican Party has form in the tax reform arena. In 1986 Ronald Reagan successfully untangled the tax knot to reduce tax rates but broaden the tax base so no revenue was lost. The White House today is promising simplification by reducing seven income tax rates to three and getting rid of some of the deductions that can add complexity. The top rate of income tax would fall from 39.6% to 35% for example. The team also wishes to reduce corporation tax to 15% from 35% -paid for by economic growth (!) and a one-off bonanza from repatriated untaxed offshore corporate funds.

Herein there is a danger. If I am a high earner there is a pecuniary incentive to set myself up as a US corporation to benefit from a lower tax rate. This failure to somehow match or link personal and corporation rates in some fashion happened in 1986 and is the reason behind the proliferation of S Corps today. Kansa tried a similar approach to the Trump proposal and it led to a surge in avoidance.

Reforms could lead to a better US tax environment but the initial stabs at change will need refinement. Firstly, changes will require need Democrat buy-in, secondly further thought is needed on how they may be at least revenue neutral and finally, changes need to benefit a broad base of Americans.

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