Looking at the tax plan unveiled by Donald Trump, one finds many answers but even more questions. Here are a few of the big issues:
1. What happens with international taxation of American companies? Most people would find it odd to start with this issue, but it is one of the biggest. Today, if an American company does business in Germany and makes ten million dollars in profits there, it pays no tax until it brings that profit back to the USA. That would mean at 35% tax on ten million dollars, so the company leaves the money in Germany to avoid the tax. At the moment, American companies have something more than two trillion dollars abroad for just this reason. Trump's plan changes that. He wants to tax foreign profits at 10%, and he wants to start with a ten percent tax on that two plus trillion dollars in year one.
Trump's proposed change is coupled with another move: he will cut the regular corporate tax rate to 15%. The cut in the corporate tax rate will move America from being the highest tax location in the developed world to one that will be highly competitive with other countries. The hope is to boost growth here by attracting investment.
But here's the problem. Why would a company locate in the USA if it would suddenly have to pay 10% of its profits in other countries to the American government? Wouldn't it make more sense to put the headquarters elsewhere? In that way, the company could still only pay 15% on its American activities, but it would not need to pay additional American taxes on activities around the world. A rational CEO would try to move his company out of the USA in order to escape that extra tax burden. Trump's move would push companies out of the USA, not bring them in here.
There are ways that this result could be avoided, but Trump hasn't chosen to employ any of them.
2. What happens to deductions like medical expenses? Trump tells us that home mortgage interest and charity will still be deductible like now. Other deductions are in limbo. But how about someone who is extremely ill and who needs constant nursing. Today, that expense is deductible, and it often erases the income tax liability of the patient and his or her family. Someone who is paying something like a hundred thousand dollars per year for nurses/aides is already using up all or almost all of their savings. Should we still be taxing them for the income that they get? Trump seems to be saying yes.
3. Why should the death tax be repealed? The federal estate tax is already set to a level where it kicks in only above ten million for a married couple, and it is indexed to inflation so it will rise over time. This is not an issue of family farms or small businesses; rather, it is a gift to the super rich who will be able to pass wealth to their heirs without the passing generations diluting that fortune. Do we really want a group of hereditary financial aristocrats? I don't think so.
There's more, but these are just three of the most salient points.
1. What happens with international taxation of American companies? Most people would find it odd to start with this issue, but it is one of the biggest. Today, if an American company does business in Germany and makes ten million dollars in profits there, it pays no tax until it brings that profit back to the USA. That would mean at 35% tax on ten million dollars, so the company leaves the money in Germany to avoid the tax. At the moment, American companies have something more than two trillion dollars abroad for just this reason. Trump's plan changes that. He wants to tax foreign profits at 10%, and he wants to start with a ten percent tax on that two plus trillion dollars in year one.
Trump's proposed change is coupled with another move: he will cut the regular corporate tax rate to 15%. The cut in the corporate tax rate will move America from being the highest tax location in the developed world to one that will be highly competitive with other countries. The hope is to boost growth here by attracting investment.
But here's the problem. Why would a company locate in the USA if it would suddenly have to pay 10% of its profits in other countries to the American government? Wouldn't it make more sense to put the headquarters elsewhere? In that way, the company could still only pay 15% on its American activities, but it would not need to pay additional American taxes on activities around the world. A rational CEO would try to move his company out of the USA in order to escape that extra tax burden. Trump's move would push companies out of the USA, not bring them in here.
There are ways that this result could be avoided, but Trump hasn't chosen to employ any of them.
2. What happens to deductions like medical expenses? Trump tells us that home mortgage interest and charity will still be deductible like now. Other deductions are in limbo. But how about someone who is extremely ill and who needs constant nursing. Today, that expense is deductible, and it often erases the income tax liability of the patient and his or her family. Someone who is paying something like a hundred thousand dollars per year for nurses/aides is already using up all or almost all of their savings. Should we still be taxing them for the income that they get? Trump seems to be saying yes.
3. Why should the death tax be repealed? The federal estate tax is already set to a level where it kicks in only above ten million for a married couple, and it is indexed to inflation so it will rise over time. This is not an issue of family farms or small businesses; rather, it is a gift to the super rich who will be able to pass wealth to their heirs without the passing generations diluting that fortune. Do we really want a group of hereditary financial aristocrats? I don't think so.
There's more, but these are just three of the most salient points.
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