After having made it through one of the more contentious political campaigns in history, citizens of the United States now anxiously await finding out whether President-elect Trump’s campaign promises will hold true. Let’s take a look at what President-elect Trump proposes regarding the U.S. economy and tax policy:
Build the Wall - Trump proposes to remove millions of undocumented immigrants living in the U.S., and to construct a wall across the entire U.S./Mexican border on Mexico’s dime. In addition, Trump wants to re-negotiate trade agreements specifically with Mexico and China. Trump claims he will add 25 million jobs to the market over the next 10 years by negotiating fair trade deals that will lead to more jobs on U.S. soil; narrowing our trade deficit; increasing domestic production; and enacting a massive tax reduction and simplification. Moody’s Analytics issued an analysis of the macroeconomic consequences of Trump’s economic policies. The analysis presented three scenarios, 1 – Trump’s proposals at face value, 2 – Trump’s policies fully adopted but on a smaller scale, and 3 – Trump negotiates with congress resulting in his policies being scaled back and adjusted. Under each scenario, Moody’s predicts our country will be in a worse position at the end of Trump’s term than we are now in terms of employment, GDP, and the deficit. Why? Undocumented immigrants currently account for over 5% of the labor force, so the labor force will tighten and labor costs will rise as employers attempt to fill positions currently occupied by undocumented immigrants - many of these jobs are in landscaping, construction, and agriculture, jobs that many native-born Americans may not be willing to do. Trump’s proposal to increase tariffs on Mexico and China would most likely be met with in-kind tariff increases that would have a significant impact on U.S. exports. Mexico and China account for approximately one-fourth of total U.S. goods exports.
Reduce Taxes to Increase Spending - From a tax policy standpoint, Trump wants to implement massive tax reductions. While that sounds great, there needs to be an offset for the reduction in taxes to avoid adding to the national debt. Some of the tax reductions Trump proposed are:
- Reduction of the corporate income tax rate from the highest current rate of 35% down to 15%;
- Reduction of the individual income tax rate from highest rate of 39.6% to 33%;
- Repeal of the Estate & Gift Tax;
- Repeal of the Alternative Minimum Tax; and
- Repeal of the Net Investment Income through repeal of the Affordable Care Act (Obamacare).
The Moody’s analysis estimates the cost of Trump’s tax proposals is $9.5 trillion over the next decade. Trump has been unclear as to how the tax cuts will be paid for, other than saying he will eliminate waste in government. Another practical way to offset tax reductions is by broadening the tax base (in other words, increase taxable income). The Tax Foundation issued a fiscal fact analysis on options for broadening the U.S. tax base last November. They say broadening the tax base would simplify the tax code, remove unfair preferences, and create economic growth. The Tax Foundation mentions three options for broadening the tax base: end the exclusion of employer-sponsored health insurance, remove the cap on Social Security payroll tax, and capping itemized deductions. They claim together all three options would raise enough revenue on a static basis to lower the corporate tax rate to 20%, the ordinary income rate to 29.5%, and the top capital gains rate and dividends to 13%. The Moody’s analysis claims of the 3 scenarios mentioned above, the most likely scenario would be scenario 3, which would cost a little more than $1 trillion dollars over the next decade.
Further tax changes Trump has proposed is to tax carried interest at ordinary income rates, which would offset some of the costs of these tax rate reductions. The Congressional Budget Office estimates taxing the carried-interest at ordinary rates (presumably 39.6%) would net $18 billion over 10 years. Another potential area of savings would be the Earned Income Credit. The inspector general for the Internal Revenue Service estimates $15.6 billion of Earned Income Credits was erroneously paid out in fiscal year 2015 and has historically resulted in $13 - $15 billion in erroneous payments annually.
The Affordable Care Act - Trump was very vocal about repealing the Affordable Care Act. The Congressional Budget Office estimates the Affordable Care Act will cost the federal government $1.34 trillion over the next decade. Trump’s proposal for healthcare will be based on “free market principles.” Here is what we know so far about Trump’s plan for healthcare:
- Repeal of the Affordable Care Act (including the 3.8% Net Investment Income Tax)
- Keep Pre-Existing Conditions
- Continue to allow children to be covered under their parents health insurance plans until they turn 26 years old
- Reduce barriers to interstate sale of health insurance
- Institute a full tax deduction for insurance premium payment for individuals
- Make Health Savings Accounts inheritable
- Require price transparency
- Block-grant Medicaid to the states
- Allow for more overseas drug providers
The impact this will have on uninsured individuals remains to be seen.
Politics aside, we should all be prepared for many changes over the next several months. Your Citrin Cooperman advisors will continue to stay on top of both speculation and current policy to ensure that our clients are ready for impending legislation. About the Author
Brian Criscio, CPA, is a manager based in Citrin Cooperman’s Connecticut office. He can be reached at firstname.lastname@example.org or by phone at (203) 847-4068. Citrin Cooperman is a full-service accounting and consulting firm with 10 locations throughout the Mid-Atlantic region. Visit us at www.citrincooperman.com.