In April, the White House released a one page sheet subtitled “The Biggest Individual and Business Tax Cut in American History.” It briefly describes the goals of the 2017 tax reform that Trump promised to deliver in his presidential campaign. Within thirty days of this announcement, the White House released an ambitious 2018 budget proposal for the U.S. Government subtitled “A New Foundation for American Greatness.” Looking closer at the tax reform proposal and the detail of the proposed budget, there are many questions as to how this administration will be able to achieve the promises it is making. By the end of this article you will have a better idea of the tax and budget overhauls that are currently making headlines and some challenges in making them work concurrently.
Per the White House’s brief release on Tax Reform, the goals are to “grow the economy and create millions of jobs,” simplify the tax code, provide tax relief to the middle class and decrease the business tax rate significantly. This will be achieved by:
- Repealing the 3.8% Net Investment Income Tax that was initiated with the Affordable Care Act AKA “Obamacare.”
- Reducing the number of individual income tax brackets from 7 to 3, 10%, 25% and 35%.
- Doubling the standard deductions, eliminating unspecified deductions, the estate tax and the alternative minimum tax AKA “AMT.”
- Reduce the business tax rate to 15%, which is also applied to pass-through entities (S-Corporations and LLCs) and sole proprietors.
An ordinary budget begins with projected revenues, subtracts expenses and ends with a shortage or surplus. Our government has had annual deficits since 2002, with deficits peaking over $1.4 trillion in 2009. The last four years have had annual deficits ranging from $400 to $700 billion. These shortfalls are funded by debt that is assumed to eventually be paid for by our children.
President Trump’s budget aims to create massive economic growth that results in a balanced budget by reforming namely Health Care, Taxes, Immigration, Reduced Federal Spending, Rollback of Regulations, Energy Development, Welfare and Education. Looking at the numbers, the current annual budget deficit of ~ $600 billion will be gradually reduced to 0 by 2027 mostly from higher tax revenues. Although general outlays increase over this same period, tax revenues increase at a greater rate to cut the annual deficits. However, the increased tax revenues become mysterious when you turn around and look at the proposed tax reforms.
A reasonable person would expect that lowering the top tax rates, eliminating tax breaks, the estate tax and AMT for the purpose of providing tax relief for American families will result in lower tax revenues. Lower tax revenues generally means higher deficits. As noted earlier, the goal of the tax reform is to create millions of jobs and grow the economy. The mystery however: revenues from estate and gift taxes, business taxes, individual income taxes are all projected to increase over the next ten years. Individual income taxes almost double from $1.6 to $3 trillion annually during this time span. How is this possible if the top tax rate for individuals is going from 39.6% to 35%, and a bevy of deductions will disappear? Business taxes are projected to increase from $324 to $497 billion annually. However, the top rate will be going from 35% to 15%? Estate tax revenue increases from $23 to $43 billion. How is that possible if the estate tax is on the chopping block? Is it actually on the chopping block? Social Security and Medicare payroll taxes both go up significantly, presumably the result of a massive number of newly created jobs.
My questions do not stem from doubting the administration’s goals. I want a balanced budget and more jobs. I do not want to overspend and pass the bill to our children. The solution seems to lie in a combination of higher taxes and lower spending until we can not only balance the budget but also pay down the $20 trillion national debt. This is the elephant in the room. Approximately $14 trillion of the national debt is held by the public, which requires the government to pay a projected $315 billion in 2018.
As interest rates increase and as deficits continue (they are projected to do so in the budget through 2026), the interest payments increase steadily from $315 to $639 billion in 2027. This is a staggering number that could surpass the entire Defense department budget by that year (Defense is budgeted $722 billion in 2027). We don’t know how the Federal Reserve will increase interest rates over the next few years other than they will be increasing. Trump has stated that tax reform will result in higher tax revenue as a result of an economic boom and more jobs being created, but will it cover the projected expenses to balance the budget?
I encourage you to go to (https://www.whitehouse.gov/omb/budget) to read this proposed budget in detail. There are twenty pages focusing his vision of America’s future. How we spend our money and allocate funding tells a lot about our values as a nation. It is particularly telling that we spend over 50% of our discretionary budget on Defense. Included in the discretionary budget is spending for the EPA, NASA, the Department of Education, Labor, Transportation, the Treasury etc. Due to the apparent conflicts in the proposed tax reform and this budget, we are eager to learn more details about the tax plan that are sure to emerge in the coming weeks and months. Stay tuned.
Donovan Thiessen, CPA has worked with Gerety & Associates, CPAs in Las Vegas, NV for 9 years, focusing on trust and estate, and individual and business income taxation. The firm has substantial experience in estate planning and has the ability to handle complex transactions. You may reach Donovan at firstname.lastname@example.org and 702.933.2213.