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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
MARCH 22 , 2017
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This week in IntelDigest, we continue a discussion on Tax Reform, a vital factor in the strategy to grow the American economy out of the very-deep-hole known as the National Debt. As we stated two weeks ago, the new Administration … in its zeal to overturn All Things Obama … is making a serious tactical error in tackling healthcare ahead of all other matters. Nothing is more important than using Tax Reform to begin the process of growing the Economy faster than the Debt.
The Republican Plan – A Better Way?
So, we turn to the initial proposals to use the Internal Revenue Code to spur American business … the tax proposals of the House Republicans. The Republican Agenda, issued by House Speaker Paul Ryan, is titled “A Better Way.” Although it addresses a number of policy areas, we will spend the next few issues solely on the tax proposals.
We will look at both Corporate and Individual tax provisions. Most large American businesses are incorporated; the majority of businesses are organized as proprietorships, partnerships, or limited liability companies taxed as partnerships and subject to the Individual tax rates and rules.
If Tax Reform is going to provide the impetus to kick-start the economy, business owners among all these organizations must be able to benefit from Tax Reform and plow their tax savings into growing their own businesses and the U.S. economy.
Before we begin, we should acknowledge that it’s very difficult to calculate how much effect each of the tax proposals would have in the end. Not only because we are very early in the process, and even the most basic tax reforms will not pass the Congress before the end of the year. But also because of the innate ability of the American businessman/woman to “game” whatever tax rules exist in order to reduce his/her company’s exposure to taxation!
Corporation Tax Proposals
The Congressional plan includes the following tax changes:
• Reduction of top Corporation income tax rate from 35% to 20%
• Elimination of the Alternative Minimum Tax (AMT) on corporations
• Immediate deductions for capital investment expenditures (Depreciation)
• Indefinite carryforward of net operating losses
• Repatriation of foreign cash holdings at an 8.75% tax rate (limited time offer)
• Exemption of foreign-subsidiary dividends from U.S. tax
The following changes would partially offset the new breaks:
• No Interest Deduction on future loans
• Elimination of many deductions (except Credit for research and development costs)
The overall effect, if all these changes were to be signed into law, would be significant tax savings for large and small corporations alike, and simplification of tax compliance.
Lowering the top Corporation tax rate will benefit mostly large corporations; they would cumulatively save many Hundreds of Millions of Dollars, which could be re-injected into the economy. The ability to “expense” capital expenditures in the year of purchase … rather than depreciating or amortizing over a number of years … would profit companies across-the-board. Businesses of all sizes expend capital on plant-and-equipment … from computers and furniture and vehicles in small businesses to large-scale construction and factory equipment and fleets of vehicles in bigger companies.
Among the winners: technology and biotech firms which would still be able to write off Research and Development Costs; manufacturing and industrial firms which can immediately expense large capital expenditures.
A minority of businesses would benefit from a repeal of the Alternative Minimum Tax, but many more would make use of Loss Carryforward provisions, which would reduce taxes in future years. Multinational companies stand to gain from the proposals pertaining to foreign operations.
One of the most important factors would be the potential repatriation of funds held overseas. We have addressed this issue in IntelDigest on several occasions. The largest American multinationals have held large amounts of Cash overseas, estimated cumulatively at approximately Two Trillion Dollars, for several years. The U.S. Corporation Income Tax on that sum would be about 35%; hence, a reluctance to bring that Cash back to our shores.
However, most companies would jump at the chance to pay 8.75% on repatriated funds, and the remainder would be a welcome addition to the U.S. Economy.
Individual Tax Proposals
The Congressional plan includes the following tax changes for individuals and families, some of which apply to the small business sector:
• Reduction of the top Individual tax rate to 33% (many prosperous taxpayers can have an effective top rate close to 40% for federal income taxes alone)
• Possible reduction of top rate to 25% for self-employed and business owners
• Elimination of the Alternative Minimum Tax (AMT)
• Repeal of the Estate Tax and Gift Tax
Other proposals have less impact on the economy, but would be important to individuals and families which could benefit or be affected:
• Elimination of itemized deductions (except mortgage interest, charitable donations)
• Larger standard deductions and child/dependent care tax credits
• Streamlined education tax benefits
• Improved Earned Income Tax Credit (EITC)
Regarding the business-related proposals and their impact on the economy, a large portion of the American economy … and the largest creator of new jobs … is Small Business. Most Small Businesses are owned by people who pay Individual tax rates. So, Small Business owners will arrange their organizations and tax reporting to take advantage of lower tax rates and expensing capital investments.
With a top tax rate of 25% applying to proprietorships and pass-through entities such as partnerships, limited liability companies, Subchapter S corporations, we will see a form of “Musical Chairs” as business owners and investors and self-employed individuals reorganize to take the most advantage of tax law changes.
But, this is NOT a bad thing. More tax-saving by Americans who are capable of re-injecting those savings into the U.S. Economy is a very good thing.
We will be writing about Tax Reform for the rest of the month … outlining proposals, burrowing into details, and analyzing the probabilities for passage and implementation in the near future.