Expert Identifies Tax Changes We Could See Under forthcoming President Trump and Republican-led Congress
Presentation comes less than 12 hours after election results known, to annual conference of Michigan CPAs.
GRAND RAPIDS, Michigan, November 9th, 2016—Released at 1:30pm Eastern—Anderson Economic Group, one of the nation’s leading analysts of state and local tax policy, has identified six tax policies that President-Elect Trump and a Republican-controlled House and Senate could pursue in the coming years. The results—which the authors acknowledged required early-morning editing after stunning election results came in—are being presented to the Michigan Association of CPAs conference in Grand Rapids, Michigan, at the session scheduled well before the election turned into a historic upset.
The presentation was made by Patrick L. Anderson, Principal & CEO of Anderson Economic Group LLC, who was accompanied by Alex Rosaen, director of the firm’s public policy practice area. The company, with offices in Chicago, New York City, East Lansing, and Istanbul, is one of the country’s leading tax policy consultants. The Anderson Economic Group State Business Tax Burden studies, which now have been produced over a 10-year period, are the leading reference on business tax burdens across all 50 states.
“As surprising as the election results are, we have to recognize that there is a messy order in the peoples’ decisions,” said Patrick L. Anderson, “with their election of a populist business leader as President, and a Republican House whose Speaker has a well-documented agenda, we can identify at least six different tax law changes that are highly likely to be adopted in some form.”
The top six tax policy changes the experts expected to see in the first years of Mr. Trump’s presidency, as presented less than 12 hours after the 3 am victory speech by Mr. Trump, are listed below.
Top Six Likely Tax Changes Under The New President and Congress
1. Attack on “Carried Interest”
- A general partner in an investment fund (e.g., a hedge fund or private equity fund) typically shares in the fund’s profits. The fund passes through some of its net capital gains to the general partner, which is typically taxed at 23.8% (20% for the net capital gain plus the 3.8% investment tax)—not as ordinary income. This is sometimes described as a “loophole” because the funds’ partners and managers do not necessarily have their own capital at risk in the fund.
- A great deal of Mr. Trump’s reputation as an economic populist rests on his proposal to close this loophole. Might a GOP-led Congress follow Mr. Trump’s lead on this issue?
2. Obamacare Repeal…with what kind of Replacement?
- According to Chief Justice Roberts, The Affordable Care Act is tax law!
- The problems with “Obamacare” are too severe to allow the status quo program to continue without at least some changes.
- Both Mr. Trump and Mr. Ryan have campaigned on full repeal. Both have promised a replacement but have not yet revealed their plans in detail.
- Expect all of the following to be proposed: replacing the employer health insurance deduction with an individual tax credit; more state block grants and flexibility; state-level health policy with matching state taxes; higher tax penalties for individuals that do not purchase health insurance; and higher “investment” taxes. The latter two will certainly meet a hostile reception in Congress.
3. Net Operating Loss “Reform” (if part of broad tax reform)
- This was raised to public consciousness by a partial leak of Mr. Trump’s 1995 tax return showing a claimed operating loss of over $900 million.
- Net operating losses are usually legitimate losses, and should be part of an “income tax” system.
- Only likely to be changed as part of a broader tax reform plan that cuts rates.
4. Broad Tax Reform with Lower Marginal Rates and Fewer Deductions
- Speaker Ryan and Mr. Trump agree on the outlines of a major tax reform: expect a simpler tax code with lower rates across the board…including lower taxes at the top of the income scale.
- Both promise to recoup some revenue by reducing tax expenditures…but those deals have not yet been cut.
- Selections from Paul Ryan’s A Better Way policy document are a good starting point for the first-year agenda.
5. Corporate Tax Holiday—for Repatriated Profits—with a special “repatriation tax”
- US corporations are holding tens of billions of dollars of retained earnings in foreign subsidiaries, in part because of the U.S.’s unusually high statutory corporate income tax rate.
- Mr. Trump has proposed charging a lower rate on these earnings if they are brought back to the US during a “holiday” period. This “repatriation tax” could raise billions in (one time) revenue.
- This policy may survive a Democratic filibuster in the senate. Bill Clinton has endorsed the idea in the past, and Secretary Clinton hinted at this policy as in her platform (as part of a plan to use “corporate tax reform” to raise $250 billion for infrastructure spending).
6. Expanded Child Tax Credit (and Some Other “Good Ideas”)
- Mr. Trump has proposed allowing families to deduct child care expenses for up to four children, and an EITC expanded to take into account child care expenses.
- The EITC and child care credits are perennial “good ideas” that occasionally break through at both the state and federal levels. Some others we could see:
o Reform of the notorious §280E.
o Simplifying tax filings for (very) small businesses.
o Marching towards a consumption tax base.
About Anderson Economic Group
AEG has provided independent analysis of tax, business climate, and other policy issues for numerous US states, universities, large corporations, businesses, trade associations, labor unions, cities, and counties since 1996. A large number of reports, including past business tax burden studies, are available on the company’s web site: www.AndersonEconomicGroup.com. AEG has offices in East Lansing, Michigan, Chicago, Illinois, Istanbul, Turkey, and New York City.
CONTACT: To arrange interviews, contact:
Alyssa Rollins at Anderson Economic Group’s East Lansing Office (517) 333-6984;
or Peter Schwartz, at the New York City office, at (212) 530-4785.
This presentation © 2016, Anderson Economic Group LLC. Fair use quotation allowed.