Part 2: Corporate/Business Taxes, Estate Tax, & Miscellany
Corporate Taxes:
Big Corporations would likely see a substantial tax reduction: one of the bill’s biggest aspects, and perhaps the most controversial, is the permanent reduction of the corporate tax rate from 35% to 20%- the largest one-time drop in big-business tax rate in history.
Although the US has one of the highest corporate tax rates in the world, most large corporations don’t pay that much, as their deep pockets allow them fund teams of attorneys & tax experts to take advantage of the myriad of loopholes under the tax code. After taking advantage of a variety of special deductions, U.S. corporations paid an effective marginal tax rate of just 18.6% in 2012, a rate that went unchanged despite ups and downs in the economy over the previous decade, according to a Congressional Budget Office report.
Additionally, corporations would see additional tax breaks such as a special low rate on any money they bring back to the United States from low-tax countries. Many businesses have been holding cash overseas to avoid US taxes- corporations would see a one-time tax on profit stockpiles (earned in the US or overseas), at a rate of 12% (for cash) and 5% (on illiquid assets). The entire business tax system would change from a worldwide system (where money anywhere around the globe is taxed) to a territorial system (where mostly funds earned in the US would be taxed)- large corporations have been lobbying for this for many years. The plan does impose a 10% tax on high-profit foreign subsidiaries. The goal of this is to encourage large corporations to bring in over $2.6 trillion in cash (hoarded overseas to avoid paying US taxes), so that it would “trickle-down” to the rest of the economy- however, the Congressional Research Service found that a 2004 tax holiday provided little boost to the economy, as corporations distributed repatriated cash to shareholders, not to employees.
C-corps would no longer be able to deduct interest expenses. This would make it more expensive for financial firms to borrow money to lend and invest & companies may be less likely to issue bonds & buy back their stocks. This could result in lowered stock prices, but could generate an additional $1.5 trillion in revenue to pay for the other reductions.
Pass-Thru Entities:
Americans who run businesses structured as sole proprietorships, partnerships or LLCs would get a sizable discount on their taxes. Under the bill, these "pass through" companies would pay a tax rate of only 25% on 30% of their business income (a reduction from the 39.6% the highest earners pay now). The bill tries to prevent abuse by including litany of caveats, such as prohibitions against "service firms" (i.e. doctors, law firms, accounting firms) from taking advantage of the lower 25% rate.
Noticeably absent from the bill, however, is the elimination of the carried interest loop-hole used by hedge funds, Wall Street, & some real estate developers that Trump promised to abolish on the campaign trail.
Estate Tax
The plan doubles the estate tax exemption from $5.49 million to $11 million & phases out the estate tax and the generation-skipping transfer tax entirely in six years.
This means very wealthy families (top .02%) would be able to transfer more money tax-free to their heirs. On average, fewer than 1 out of every 500 Americans who die in a given year leave estates subject to the tax. This measure burdens all but the top .02% of tax payers & may also result in decreased estate bequests & lifetime gifts to charities.
Miscellany
There are several “sleeper” provisions in the bill which could prove controversial. Here are a few:
- Churches would now be allowed to make political statements (while retaining their tax-exempt treatment)
- Tax credits for disabled retired people would be eliminated
- New agreements for spousal support/alimony – payments would no longer be deductible to the payer (or taxable to the recipient)
- The proposal would make it legal to contribute to a 529 Education Saving Plan on behalf of an unborn child (defined as “a member of the species homo sapiens, at any stage of development, who is carried in the womb”).
- Many of the new provisions wouldn’t be indexed for inflation and the way other tax provisions are indexed for inflation would change.
These, and many other provisions, will be heavily scrutinized in the coming days & weeks to determine their ultimate impact and additional unintended consequences. Ultimately, if this bill passes, the wealthiest US taxpayers will most likely receive quite the windfall, resulting in a further increase in income inequality in the US.
“This is not what I would call a tax-simplification plan,” said Howard Gleckman, an economist at the nonpartisan Tax Policy Center. “It raises taxes idiosyncratically on large families in rich states. And it makes life hard for some of the very small businesses it’s trying to help.”
-by Laura Bown (Law Clerk/JD Candidate, 2018, Boyd School of Law, UNLV) with Tiffany Ballenger Floyd, Esq. (Nevada & California Estate Planning Attorney), Phillips Ballenger, PLLC