Today, National Economic Director Gary Cohn and Secretary of the Treasury Steven Mnuchin announced the Trump Tax Proposal, outlining what Cohn called a “once in a generation opportunity.”
Cohn said the primary objectives are to simplify the system, lower rates, and make the system fair (particularly for lower to middle income citizens who have “been left behind by the economy”), in an effort to create economic growth, believing that under this plan, America can get back to a 3.0 percent GDP “that’s sustainable.” He also noted that a primary goal is to eliminate breaks for special interest groups.
Citing loopholes that have “disadvantaged the average American” and tax rates that have pushed money outside of the U.S., personal and corporate tax reform were proposed with the assertion that this proposal still has many details to be fleshed out as it is sent to the House and Senate to become a bill.
Personal tax reform, protecting the MID
Regarding personal tax reform, Mnuchin conveyed that in 1935, citizens filled out a one page tax form with two pages explaining the 34 lines. Today, there are 199 tax forms that take seven billion hours a year to comply with, and Mnuchin says 90 percent of personal tax filers need help filing.
So the Trump administration believes the following will simplify the system:
- Seven tax brackets will become three (10%, 25%, and 35%).
- Doubling the standard deduction (“a zero tax rate on the first $24k a couple earns,” says Cohn).
- Tax breaks for child care costs.
- Repealing several taxes (Alternative Minimum Tax, 3.8 percent “Obamacare tax,” as they called it, and the estate tax).
The non-negotiables for the administration were protecting charitable giving and the mortgage interest deduction (MID).
We’ve written endlessly on the MID, how it is critical to homeownership, and how the National Association of Realtors (NAR) has tirelessly fought to protect the deduction.
Corporate tax reform
Secretary Mnuchin outlined the corporate tax reform proposal, citing the objective as making American business “the most competitive,” and asserting that the plan will return trillions of dollars from offshore to purchase capital and create jobs. Although they’re still working out the details on entrepreneurs and independent contractors like Realtors, Mnuchin continues to say that small to medium businesses (and assumably LLCs) will be eligible for the business rate.
The Trump Tax Proposal for corporate taxes includes the following:
- Wildly slashing the top tax rate for all businesses to 15 percent.
- Moving to a territorial tax system.
- No border tax adjustment.
- A one-time tax on overseas profits.
As real estate practitioners, most of our readers will care most deeply about the top tax rate which is 20 percent below today’s top corporate tax rate, and huge news for self employed people (like Realtors) who currently pay a top tax rate of nearly 40 percent.
NAR continues to fight for the MID
NAR has expended an enormous amount of effort into protecting the MID for many, many years. And while the MID was one of the only non-negotiables of the proposal, NAR President William E. Brown says Trump’s proposal comes “at the expense of current and prospective homeowners,” even though “major reforms are needed to lower tax rates and simplify the tax code.”
NAR appears to be the biggest winners of the fight to protect deductions (nay, the only non-charitable winner), but Brown said in a statement, “The mortgage interest deduction and the state and local tax deduction make homeownership more affordable, while 1031 like-kind exchanges help investors keep inventory on the market and money flowing to local communities,” stating that those tax incentives are now at risk (although Cohn cited the MID as one of the only protected deductions that will remain).
“Current homeowners could very well see their home’s value plummet and their equity evaporate if tax reform nullifies or eliminates the tax incentives they depend upon,” said Brown, “while prospective homebuyers will see that dream pushed further out of reach.”
What NAR didn’t say in their statement is that yes, the MID is protected under this proposal, but the unpredictability of this President’s negotiation methods means it’s vulnerable until the ink dries on a bill that protects the MID.
So the fight is still on and they’re going to continue the tradition of pushing to protect the MID. Vigorously.
Concluding, Brown said that Realtors® support tax reform, “and it’s encouraging to see leaders in Washington doing their part to get there. We believe tax rates should come down to the degree that sound fiscal policy allows, and simplifying the tax code will help ensure fairness and transparency for individual taxpayers.”
Two out of four major objectives down
Mnuchin says the overall economic plan consists of four parts: Tax cuts, tax reform, regulatory relief, and renegotiating trade deals. Today’s proposal, if it becomes a successful bill, knocks down two of the four stated pins.
People paying nearly 40 percent in taxes (aka most of our readership) could potentially be getting a large raise. If the MID is ultimately protected, current and future homeowners can rest easy. But as NAR points out, there are some real-estate related incentives like 1031 potentially on the chopping block.
Politicians on both sides have long called for a simplification of the tax system, but getting all to agree on what that looks like is no easy task, so the turns this proposal takes as it is transformed into a bill will be quite interesting.