President Trump is unveiling a tax reform plan that would sharply cut taxes for businesses as well as most individual taxpayers. In perhaps the most far-reaching proposal for individuals, Trump wants to eliminate the federal deduction for state and local taxes.
This wouldn't mean much to residents of states like Nevada that don't have a state income tax, but it would take a big bite out of taxpayers from New York, New Jersey, California, and other high-tax states, many of which are Democratic.
But while the local tax deduction would go away, Trump proposes to double the standard deduction for everyone. The top tax rate for individuals would fall from today's 39.6% to 35%. There would be lower rates of 10% and 25% for those with lower incomes.
The estate tax and alternative minimum tax -- which often snares high-income taxpayers who take a lot of deductions -- would both be eliminated.
Effect on real estate
Real estate interests were earlier concerned that Trump would eliminate the deduction for mortgage interest. But even without that, doubling the standard deduction and cutting tax rates might make the mortgage deduction less valuable, thereby reducing consumers' inclination to go into debt to buy a home.
Businesses would get a hefty helping of tax relief. The corporate tax rate would be more than halved, dropping to 15% from 35%, and most foreign profits would not be taxed, as is the case in most countries.
The tax rate on business income that "flows through" to individual returns from LLCs, Subchapter S corporations, and similar corporate entities would also drop to 15% instead of being taxed at individual tax rates.
The stated goal, of course, is to stimulate growth of the economy, but the many tax cuts would also increase the deficit, which may spark opposition from more conservative members of Congress.
“It’s our intention to create a huge tax cut and equally as important, a huge simplification of the tax system in America,” said Gary Cohn, the director of Trump’s National Economic Council, in a briefing to a small group of reporters today, the Wall Street Journal reported.
But skeptics say it won't be that easy.
“Trump's proposal to cut corporate tax rates won't boost growth or create jobs," said Marshall Steinbaum, Senior Economist and Fellow at the Roosevelt Institute. "In fact, it will discourage corporate investment, as corporations and their shareholders earn even higher profits and pocket more of the cash -- just like they did last time we tried a big corporate tax cut."
If Trump wants to encourage investment, Steinbaum said, "He should close loopholes that CEOs exploit to move profits offshore and increase the effective tax rate on corporations, their CEOs, and their shareholders.”