Trump’s Tax Proposal: The Opening Move in a Poker Game

Corporate tax highlights:

• Cut the corporate income tax rate from its current 35% to 15%.
• Apply the revised 15% corporate tax rate to "pass-through" entities, which include most partnerships and limited liability companies (small businesses)
• Levy a one-time tax on the approximate $2.6 trillion in earnings that US corporations hold offshore—though the rate at which those assets would be taxed is unclear.  
• Interestingly, the infamous and controversial border-adjustment tax is not included in this proposal. Without White House support, it doesn't matter if House Republicans like it—it’s gone.

Individual tax highlights:

• Cut the current seven personal income tax rates to three: 10%, 25% and 35%. The top rate is currently 39.6%.
• Double the standard deduction, which would essentially eliminate taxes on the first $24,000 of a couple's income.
• Repeal the alternative minimum tax, estate and gift taxes, and state and local tax deductions.
• Repeal all personal deductions except for charity and mortgage interest.

My views:

At face value, this tax plan would explode the deficit. I think the large proposed cut in the tax rate on small business income is President Trump acknowledging that he owes these businesses something for their support during the election. I very much doubt we will get the business tax rate pushed down to 15%. But I could see a 25% rate, which would still be a  significant tax cut. If the current plan passes "as-is," I would expect a significant surge in growth and would raise my current projections for GDP and inflation. The Federal Reserve would also be likely to tighten more aggressively. Think of this as the opening move in a poker game. It’s unlikely that any of these proposals will come to fruition in their current form. I expect a tax deal to be passed, but I think the final version will be much more affordable than what’s currently proposed.

MALR017115