Trump’s Tax Reforms: What to Expect?

With Donald Trump becoming the 45th President of the United States, the implementation of certain policies talked of by the leader during his presidential campaign is likely to take shape. The abolition of Obama’s Affordable Care Act is at the top of the president’s list, but there are other reforms that will shape the American future in the coming months. One such reform relates to individual and corporate taxes.

What constitutes Trump’s tax policies?

Donald Trump proposes two tax reforms for domestic businesses for making them lucrative. Firstly, he proposes to reduce the corporate tax rate from 35% to 15%. The Tax Foundation, a neutral research body, says that the US has the world’s third-highest corporate tax rate when local and states taxes are compounded in the structure. The move is likely to attract more investors towards the country’s domestic businesses. Secondly, the president proposes a special repatriation tax of 10% for multinationals in the US. The creation of this tax is expected to bring home the $2.5 trillion held in foreign countries by encouraging multinationals to pump the money back into the economy, thus paving the way for business reinvestment, hiring and expansion.

Trump plans to simplify the tax structure for individual taxpayers by setting three in place of the current seven tax brackets. The new tax structure comprises three slab rates of 12%, 25% and 33% for single and married tax filers. The individual tax reform is also an implication that the president is willing to compromise with a Republican Congress for amending the current tax structure. The new tax structure for individuals would increase standard deductions for single and married filers and eliminate all other itemized deductions such as estate tax, net investment income tax, alternative minimum tax, and medicare surtax.

The disappointing aspect of the reform

The new tax structure does nothing to address capital gains tax rate. Under the reforms, investors would owe less in terms of short-term capital gains tax if they held sold properties for 365 days or less. However, the long-term capital gains tax rates of 0%, 15% and 20% undergo no change, the application of which is presumed to be 12% ordinary income slab, 25% ordinary income slab, 33% ordinary tax slab. The objective behind adjusting capital gains tax is to boost wealth of the middle class Americans.

The reduction of capital gains tax could promote excess tax savings for wealthier Americans, and possibly reduce federal tax revenues and increase deficit. However, it would also reduce the wealth gap between the middle class and top 1% of wealthy Americans.

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