PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Trump’s “Core Four” on Tax Relief and Reform

By at 9 December, 2016, 9:07 am

taxhelp2 

by Raymond J. Keating-

Baseball fans – and New York Yankees fans in particular – understand who the “Core Four” were. Derek Jeter, Jorge Posada, Mariano Rivera and Andy Pettitte were drafted or signed as amateurs by the Yankees, and are considered the core four that helped lead the Bronx Bombers to win four World Series in five years from 1996 to 2000.

This idea of a “core four” came to mind when looking at the Trump tax reform plan.

Some unnecessary controversy has swirled around the agenda with President-elect Donald Trump’s choice for treasury secretary, Steven Mnuchin, telling CNBC on November 30, “Any reductions we have in upper-income taxes will be offset by less deductions, so that there will be no absolute tax cut for the upper class. There will be a big tax cut for the middle class, but any tax cuts we have for the upper class will be offset by less deductions that pay for it.” Let’s hope that Mnuchin’s use of terms like “upper class” and his declarations on absolute tax relief for upper-income earners – many of whom are entrepreneurs and investors – was just some early-on-the-job jitters.

The Trump Tax Plan

The Trump tax plan offers a sound foundation upon which to build a potentially robust plan for much-needed, across-the-board, permanent tax relief and reform. Indeed, the Trump “core four” tax relief and reform proposals are:

1) Reducing personal income tax rates. The Trump plan calls for seven personal income tax brackets ranging from 10 percent to 39.6 percent to be collapsed into three brackets of 12 percent, 25 percent and 33 percent.

2) Reducing the capital gains tax rate. While the 20 percent capital gains tax would be left unchanged, with carried interest taxed as ordinary income (thereby raising that tax rate from 20 percent to 33 percent), the ObamaCare 3.8 percent tax would repealed only as it applies to investment income, thereby reducing the effective capital gains tax rate from 23.8 percent to 20 percent.

3) Killing the death tax. The death tax will be repealed, but capital gains at death over $10 million would be taxed.

4) Reducing corporate income and business taxes, and allowing for expensing. On corporate taxes, the tax rate would be reduced from 35 percent to 15 percent, the corporate alternative minimum tax would be eliminated, and expensing of capital expenditures would be allowed. The Trump tax plan also calls for a 15 percent top rate on S-Corps and other pass-through entities like LLCs.

These are the “core four” principles that need to guide tax relief and reform going forward.

Trump’s Plan, Congress, and Issues to Be Debated

Within and around each of these principles, issues will be debated. For example, there is significant debate over border adjustability of taxes tied to the Trump agenda and the House tax reform outline that unnecessarily complicates matters with no substantive potential benefits. And since we need to spur entrepreneurship and investment forward, a much deeper reduction in the capital gains tax is warranted (indeed, why not kill this destructive tax altogether?).

In SBE Council’s report – Gap Analysis 8: Policy Solutions for Closing the Gaps in Our Economy: Proven Models and Actions from Past Administrations – we offered a mix of tax changes based on policies from past presidential administrations that are pro-growth, pro-entrepreneur, and that certainly tie in with the “core four” measures in the Trump plan: 1) a two-rate personal income tax with a top total rate of 25 percent; 2) a capital gains tax of 15 percent, or even better, 0 percent; 3) no death tax; and 4) a corporate income tax rate of 25 percent and expensing as an option for all businesses (no matter the size or business form).

President-elect Trump’s team is already working with House Ways and Means Chairman Kevin Brady (R-TX), who released the GOP’s Better Way tax plan in June of this year. Chairman Brady describes his tax plan as a “kissing cousin” to the Trump plan.  The Chairman’s plan would cut the corporate rate to 20 percent, a small business tax rate (pass-throughs, S-Corps, LLCs) of 25 percent, and three individual tax rates of 12, 25 and 33 percent. His plan also includes full expensing, a long-term capital gains rate of 16.5 percent, and complete death tax repeal.

Establish the “core four” and build the right policies around them, and U.S. tax reform and relief can be a critical part of the foundation upon which entrepreneurship, investment, productivity, GDP, incomes and jobs can robustly grow. Indeed, such a plan would win the tax reform championship.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

News and Media Releases