Trump Plan Trims Private Company Taxes

by FEI Daily Staff

Donald Trump, the Republican presidential front-runner, has proposed a more generous tax cut plan than Marco Rubio.


Various studies from conservative, liberal and centrist think tanks have found the total size of Trump’s tax plan (in terms of the net reduction in federal revenue) ranges from $9.5 to $12.0 trillion (T)1 over the next 10 years, with the conservative Tax Foundation and liberal Citizens for Tax Justice in surprising agreement on the higher figure.

Like Rubio’s proposal (see FEI Daily article on Rubio’s tax plan), there is much in the Trump plan that affects private companies positively and negatively.  Using the very detailed analysis of the Tax Policy Center’s (TPC) study of the Trump Plan2, we can determine the effect on federal revenue of those provisions in the Trump plan that affect private companies, under the assumption that a decrease in federal revenue represents a decrease in private companies’ tax obligations.

However, an evaluation of federal tax receipts will not capture the knock-on effects for state and local taxes (e.g. effective state rates should increase as federal income tax deductions are curtailed or eliminated for states that accept all or some federal deductions).  Nor does it account for the plan’s dynamic impact on economic growth, which can vary significantly across economic models.

The TPC study identifies a number of key components of the Trump plan that:

Individual Income Tax

  • Reduce the existing seven tax brackets (ranging from 10 to 39.6 percent), to three brackets of 10, 20, and 25 percent.
  • Triple the standard deduction to $25,000 for single filers and $50,000 for joint filers in 2015, indexed for inflation thereafter. The TPC believes this would decrease the number of itemizers by 86 percent in 2017.  Personal exemptions would remain at $4,000 per person, indexed.
  • Apply a maximum rate of 20 percent in taxing dividends and capital gains, eliminating the 3.8 percent ACA surcharge.
  • Cap at 10 percent (the Trump plan is somewhat vague on this) the tax value of itemized deductions (other than charitable contributions and mortgage interest) plus exclusions for employer-provided health insurance and tax-exempt interest.
  • Double the Pease phase-out rate to 6 percent for personal exemptions, and the TPC assumes that the PEP phase-out rate would also double to 4 percent on itemized deductions.
  • Eliminate the AMT.
  • Treat carried interest as ordinary business income for tax purposes.
  • Repeal the exclusion for investment income on life insurance contracts entered into after 2016.
Estate and Gift Taxes
  • Eliminate federal estate and gift taxes.
Business Taxes
  • Reduce the corporate tax rate as well as the top tax rate on pass-through business income to 15 percent starting in 2017.
  • Repeal most tax subsidies for businesses.
  • Eliminate the corporate AMT.
  • Impose a maximum 10 percent deemed repatriation tax on the accumulated offshore profits of foreign subsidiaries of U.S. companies, payable over 10 years.
  • Eliminate the deferral of tax on the profits of foreign subsidiaries of U.S. companies.
Affordable Care Act Taxes
  • Repeal the 3.8 percent net investment income tax on high-income taxpayers.
TPC estimates the Trump plan would reduce federal receipts $9.5T from 2016 to 2026 (excluding increased interest costs).  The largest impact on federal tax revenue would come from restructuring the individual tax rate brackets and raising the standard deduction.  Together, these reduce federal receipts by $7.36T over the next 10 years.

Repealing the individual AMT, the ACA 3.8 percent surtax, and all estate and gift taxes would reduce federal receipts another $782 billion (B) over the same 10-year period.  Of course, these tax reductions would be spread across all taxpayers, not just private company owners.

The max 15 percent rate on private company owners’ pass-through income would yield $997B in tax savings over 10 years, in contrast to $2.5T for C-Corps (from the 15 percent corporate rate plus the repeal of the corporate AMT).

Ten-year offsetting tax increases in Trump’s proposal include: $147B from doubling Pease and PEP phase-out rates, $909B from capping deductions at 10 percent, $309B from eliminating select business tax expenditures (compared to $264B from eliminating certain corporate tax expenditures) and $75B from repealing the exclusion for investment income on life insurance contracts.  The cost to businesses with international operations of the repatriation tax and repeal of the deferral of tax on foreign profits would be $307B over 10 years.

Interestingly, taxing carried interest as income would result in a net decrease of $500 million in federal receipts, given the reduction in the top business income tax rate to 15 percent compared to the top capital gains rate of 20 percent (most entities utilizing carried interest are organized as partnerships).

The Trump proposal would lower the marginal effective tax rate (METR)3 on new investment for pass-through entities from 19.1 percent to 10.9 percent, or a net drop of 8.2 percentage points.  Corporations would see their METR on new investment decline 10.2 percentage points (from 25.7 to 15.9 percent).

However, while the METR on equity-financed corporate investments would decline from 32.5 to 18.9 percent, the METR on debt-financed corporate investment would actually increase from -6.2 to 4.8 percent – stemming largely from the reduced value of interest deductibility with a lower corporate tax rate.

The Trump plan would increase the number of households paying no income tax (as opposed to payroll tax) from 77 million to 110 million, or from 44 percent to 63 percent of total households.  The average tax cut across the board would be $5,100 in 2017, while the average tax cut for the top 1 percent would be $275,257.

The impact of the Trump plan on economic growth varies, depending partly on whether these tax cuts are offset by spending cuts or financed.  If offset, the TPC estimates discretionary federal spending would have to be reduced by 82 percent in 2025 or Medicare and Social Security by 41 percent.  Since Trump has indicated he intends to increase military spending and protect entitlement programs, the prospects for soaring deficit spending loom large.  If these shortfalls are financed, independent research and the TPC suggest the impact on economic growth would be net negative.

The prospects for $11.2T in new national debt over the next 10 years (including interest) must be particularly alarming to the Tea Party members of Congress who were elected over the last three election cycles on a balanced budget platform.

1Jackie Calmes, “Analysts Question Viability of Deep Tax Cuts Proposed by Republican Candidates”, NYT, February 22, 2016.

2Tax Policy Center, “An Analysis of Donald Trump’s Tax Plan”, Urban Institute and Brookings Institution, December 22, 2015.

3METR is a forward-looking measure of the impact of the tax system on the rate of return of a hypothetical marginal (i.e., just break-even) investment project.