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Can Trump get corporate tax cuts?

By Michael Knox - posted Friday, 26 May 2017


Trump's tax plan starts in the same way as Paul Ryan's. It reduces the individual tax brackets to only 3. These are still set at 10%, 25% and 35%. This is at a cost of US$1.5 trillion over 10 years. Trump also reduces the corporate tax rate but this time to 15%. This is at a cost of US$2.2 trillion over 10 years (this is US$ 0.5 trillion more than in the Paul Ryan tax plan). It is at this point, Trump adds the optional extras. The first is to repeal the individual alternative minimum tax. This is usually paid by high income individuals with business write-offs. This would be at a cost of US$0.4 trillion over 10 years. Next, Trump would double the standard deduction for personal income tax. This is at a cost of US$1.5 trillion over 10 years. Trump would then repeal the estate tax or death duties and this would cost US$0.2 trillion over 10 years.

After all that, Trump plans to reduce the pass-through business tax rate to 15%. Pass-through corporations in the US are similar to Trusts in Australia. Trump would then repeal the Net Investment Income Surtax. This is a tax on investment income that is levied to fund Obamacare. Repealing this tax would cost US$0.2 trillion over 10 years.

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In total, we calculate, based on the work of the Committee for a Responsible Federal Budget, that the total cost of the optional extras in the Trump tax plan is US$4.3 Trillion over 10 years. We believe that these cannot be funded by repeals in corporate tax deductions. They would therefore add directly to the US budget deficit by around US$4.3 trillion over 10 years. This tax plan has no chance of being passed through the US Senate in its current form with the simple majority of Senators that the Republican party now holds.

Conclusion

There are two possibilities. The first is that the Trump tax plan is purely a marketing document. Trump is showing all the optional extras but would be prepared to accept Ryan's basic Tax plan. He is showing a Lincoln, but would be prepared to sell a Ford.

The second possibility is that the passage of the basic tax plan would allow the Republican party to gain more than 60 seats in the US senate in the 2018 mid-term elections. This would allow the Republicans to pass some of the extra tax cuts in the Trump tax plan; these would be funded by a budget deficit. Having bought a Ford, the public might come back later for the Lincoln.

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Disclaimer

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.



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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

Other articles by this Author

All articles by Michael Knox

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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