The policy analysis provided by the Charles Schwab & Co., Inc. does not constitute and should not be interpreted as an endorsement of any political party.
Donald Trump’s White House victory, combined with Republicans retaining their majorities in both the House of Representatives and the Senate, has radically reshaped the policy and political landscape of Washington.
Among many other things, we think it has moved a significant tax reform package—likely featuring broad, across-the-board tax cuts—from an extreme long shot to a very real possibility in 2017.
Republicans will have either a 51-49 or a 52-48 majority in the Senate, depending upon the outcome of a December run-off election in Louisiana. In the House, Republicans are projected to have a majority of about 241-194, pending the results of two undecided races and two December run-off elections.
The narrow Senate majority means Congress is likely to use a process called “budget reconciliation” to fast-track tax and spending legislation. The reconciliation process, which was used by Republicans to pass the so-called Bush tax cuts in 2001 and 2003 and by Democrats to pass the Affordable Care Act in 2010, limits debate and amendments, cannot be filibustered and can be approved by Congress with a simple majority. This is critical in the Senate, where most legislation requires a 60-vote supermajority to cut off a filibuster and move forward.
The budget reconciliation process is a complicated one and is subject to a wide array of limitations, most notably its requirement that every provision in a bill must have a direct impact on the federal budget. Moreover, it is a highly partisan process that would likely attract the support of few, if any, Democrats.
Those limitations, however, are unlikely to dissuade Republicans from using it to implement sweeping tax changes.
What a tax package could look like
Trump’s plan is similar, though far from identical, to a plan championed by House Speaker Paul Ryan (R-WI) and House Republicans. It calls for reducing today’s six income brackets to three: 12%, 25% and 33%. The plan would also repeal the Alternative Minimum Tax.
The plan would increase the standard deduction to $30,000 for married filers or $15,000 for single filers. It would also cap itemized deductions at $200,000 for married taxpayers ($100,000 for single filers).
For investors, Trump’s plan calls for a 20% tax rate for capital gains and dividends. He would repeal the Net Investment Income Tax, the 3.8% surtax on investment income for wealthier filers that was imposed as part of the Affordable Care Act.
Trump has proposed repealing the estate and gift tax, an idea that has been championed by Capitol Hill Republicans for years. Trump’s plan would subject capital gains on assets held until death to tax. The first $10 million in assets per couple would be exempted from taxation.
On the corporate side of tax reform, the President-elect’s proposal calls for reducing the U.S. corporate tax rate from 35% to 15%. Owners of sole proprietorships, partnerships, S corporations and other pass-through entities could choose to be taxed on their business income at the 15% corporate rate rather than at their individual rate. Most corporate tax breaks would be eliminated, with the exception of the research and development tax credit. And Trump has called for a one-time repatriation tax rate of 10% to encourage U.S. companies to bring the trillions of dollars in cash that is stashed overseas back to the United States.
Prospects and timing for reform
President-elect Trump’s priorities and plans for his new administration are, of course, still in their infancy. Like any candidate, he made a long list of promises on the campaign trail, but he cannot accomplish all of them at once.
Tax reform, however, seems likely to be high on the new president’s list and will undoubtedly be a cornerstone of his first budget proposal, which is delivered to Congress in February.
Ultimately, though, while the new president can put forward his proposal, tax legislation will be developed by Congress. And that’s where things could get tricky.
Comprehensive tax reform has not been enacted since 1986 for a reason. It is arguably the most technically complicated and politically challenging issue facing Congress. The nation’s tax code is dizzyingly complex. Moreover, it is riddled with thousands of credits, deductions and other incentives, many of which apply to very specific constituencies and have the strong support of those constituencies. That makes change very difficult, because any tax code rewrite produces winners and losers. Lawmakers with major employers in their congressional district will want to make sure that those companies aren’t harmed by tax reform. But what’s good for one company might be bad for another in a district across the country. So reaching consensus, even among Republicans, will be difficult.
That said, there is no question that Ryan will take a run at broad tax reform in 2017. He understands the tax code as well as anyone on Capitol Hill and will try to find a way to make everyone on his side of the aisle happy.
Working out the details will take some time and success is far from a sure thing. But we think the odds for a broad tax code overhaul that includes significant tax cuts for both individuals and businesses are better than they have been in more than a decade.
What you can do next
- If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
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