Tax Reform or Tax Cut?

Digging Into the Details of Trump’s Tax Reform Plan
Or is it more about tax cuts? Either way, expect lots of changes.
Bloomberg, November 3, 2017



The long-awaited tax reform and/or tax cut proposal is finally here. Its name makes no bones about it: The Tax Cuts and Jobs Act has lots of the expected goodies in it, as well as a few surprises. There are plenty of interesting ideas in the proposal, which is one part reform and two parts tax cut.

There is a significant debate to be had over whether now is the point in the economic cycle to introduce such a substantial stimulus. This is not that debate. Instead, I want to look at the plan’s specifics, primarily these highlights:

401(k): Will remain unchanged. Chalk up a win for Wall Street that also helps upper-middle-class savers. 1

Full depreciation of capital spending: Rather than depreciate major purchases over time, nearly all capital expenditures would be written down in Year One. I previously discussed this as an “underappreciated reform that would allow companies to write off their purchases as soon as they are made.” The 100 percent immediate capex deduction is the most economically interesting part of the tax reform proposal. I suspect it has the greatest potential to have an impact on jobs and wages.

Deficits: There is no way to avoid stating the obvious: This bill is “unfunded.” After eight years of being scolded about deficits and the imminent debt crisis, the Republican tax plan contains $1.5 trillion in unfunded liabilities. We know defense spending will not be cut; entitlements are a very tough political fight to meaningfully slash, especially since on the campaign trail then-candidate Donald Trump promised not to cutMedicare or Social Security. Whatever doubts I harbored that “deficit chickenhawks” were anything other than hypocrites have now been eviscerated. 2

Corporate tax rate of 20 percent: The proposed rate not only would be effective immediately (for the 2018 calendar year), but it would also be permanent. This is more aggressive than many expected. We can debate later whether reducing rates for wealthy taxpayers encourages greater investments and therefore job creation. That argument fails when applied to “retroactive tax cuts.”

Despite the president calling the proposed corporate tax a “perfect rate,” don’t be surprised if there is some give on the latter three elements, including a potential 25 percent corporate tax rate.

S corporations and LLC pass-throughs: Don’t let your eyes glaze over: This is a key part of the new plan. It’s a favorite of House Speaker Paul Ryan’s, who is in large part a major architect of this bill. 3  He has long favored what he calls “parity” for small businesses. But the National Federation of Independent Business, a small-business lobby, opposes the bill, saying it “leaves too many small businesses out.” This is another part of the proposal that is ripe for negotiation.

Housing: One of the more controversial parts of the tax bill, it would cap the mortgage-interest deduction on new home sales at $500,000. Fears that it could “shake up the industry” or pressure home prices or even “hobble” the residential real estate market were the immediate reactions. I don’t know if I would call this a “declaration of war against the housing industry,” but it certainly is potentially significant. As a homeowner, I like the mortgage interest deduction (I am grandfathered in the new bill); as a policy observer, I understand it is flawed, as a subsidization of the real estate industry that skews toward wealthy real estate owners. Expect lots of pushback on this one.

Infrastructure: Despite promises made on the campaign trail, infrastructure is nowhere to be found in the tax bill. Elaine Chao, secretary of the U.S. Department of Transportation, told an audience at the 2017 American Trucking Associations’ Management Conference & Exhibition that Trump’s $1 trillion infrastructure proposal is on hold until after Congress passes tax reform. (I was encouraged by reports that “the White House intends to back a 7-cent gas tax increase to pay for U.S. roads, bridges, highways and other public works” but that appears to be shelved.) Infrastructure was a gimme, an easy way to bring Democrats on board. At least, it should have been.

State and local tax deduction: Is this proposal, which would eliminate the SALT deduction, just a petty swipe at blue states, a “pay-for” to offset those big deficits, or a move away from big government? I don’t know, but expect fierce resistance, even by Republicans in states that do not lean deeply GOP.

Estate tax: A purely partisan issue, with Democrats opposed to cutting it and Republicans in favor of getting rid of it. Just please do not engage in the mathematical nonsense of calling it a death tax, when 99.81 percent of all deaths do not create a taxable event.

Alternative energy: I cannot figure out the basis for the pieces in this plan, which reduces tax credits for wind power and electric cars while protecting drilling cost deductions, other than sheer pettiness. Ceding leadership in alternative energy to Chinais simply a terrible idea.

I would be very surprised if the final version did not look quite different than this first draft. Stay tuned …


1. My firm manages 401(k) plans, making me an interested party lacking somewhat in objectivity on this.

2. For our earlier discussion on Kansas tax cuts, see “The Kansas Supply-Side Experiment Unravels” and “How Much Can You Cut Taxes? Don’t Ask Kansas.” My Bloomberg View colleague Justin Fox has made similar arguments.

3. More disclosure: I am paid via two different limited liability companies. Hence, I stand to benefit personally by a substantial amount if this is passed.


Originally: Digging Into the Details of Trump’s Tax Reform Plan



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