The Phaserl


Trump’s Tax Plan: The Day After

by Karl Denninger, Market Ticker:

Let’s look at it through the lens, darkly, since we have few details but just “principles”:

First, the standard deduction is doubled. This means $12,000 earned without income tax for a single person and $24,000 for a married couple

Second, as stated all deductions other than mortgage interest and charity are gone. This is paired with deleting the AMT, which would be nonsensical to keep without the deductions. Left unsaid is whether municipal bond interest remains untaxed (I’ll assume “yes”.)

So what disappears? Plenty.

Many have bleated that “state and local tax deductions” are gone in this plan. Today you can allegedly deduct your state property taxes, for example. But this is only worth something to you if you itemize. That’s because if you itemize you do not get the standard deduction at all. You can choose either to itemize or take the standard deduction (and presumably still will be able to) but until you get into the $100,000+ income range it is almost never to your advantage to itemize. Therefore, for those in the middle class mortgage interest + property taxes are less than the standard deduction. This will be doubly true with a doubled standard deduction; ergo, this “going away” will not hurt the middle class person at all, but it will cause those who have big, expensive houses (and the income to pay for them) to lose the deduction on a decent part of their property tax — which they currently can take.

This is arguably good as it stops rewarding states and local governments for inefficient use of money and ridiculously high property taxes in the first place. It’s not that hard to find places with a $20,000+ annual property tax burden on a $750,000 house at all, which is flat-out nuts. Many of these places have seen property taxes double or more over the last decade.

But where this plan is going to run into huge problems is in the following classes of deductible expenses which, it appears, are all going away:

EITC. This is a refundable tax credit for both having kids and making a relatively small amount of money and it’s huge because it’s refundable. In other words you can get it back even if you owe no tax, which results in the government literally paying you to live. Good luck killing this one as it is a literal riot-starter in the big cities. Keeping it blows up the plan instantly.

Personal health care expenses. This is subject to a minimum of 10% of your AGI (in other words you have to spend more than 10% of your adjusted gross income before you can use it, and can only deduct the excess) but for those who run into huge medical expenses it’s pretty big. The number of people who get hammered by this in the middle class is relatively small, but the impact for those who do will be large.

Traditional IRAs. This appears to be gone too. The Roth will be untouched because ROTH IRAs are paid into with after tax money. This one I really don’t like for the simple reason that there is nothing to prevent the government from reneging on the “promise” not to tax earnings and withdrawals in a ROTH. They can and probably will break that promise in the future; a “traditional” IRA evades this risk because you pay into it with pre-tax money, but pay taxes when you take the money out — and thus it is not exposed to the government taxing you twice.

What happens to small-business SEPs/SIMPLEs? If SEP and SIMPLE deductability on pass-throughs disappears (and you must assume it will) that will have a major impact on single-member LLC retirement planning as those plans allow tax deferral of a huge amount of otherwise-earned income. This would be seriously bad for retirement planning for those with six-figure+ incomes; it is a feature of the current code that I’ve used and so have millions of other small business owners. Losing it would be offset by putting the corporate rate on pass-through income (e.g. LLCs.) The ugly side of such a change is that after-tax accounts get hammered on reinvested dividends (you have to pay taxes in the current time on reinvested funds and thus must withdraw the funds to pay the tax, reducing what you can reinvest) where deferred accounts get to reinvest the entire dividend or distributed amount.

It’s a MONSTROUS windfall for MLPs. MLPs are one of the things that today are pretty-badly disadvantaged due to them issuing K1s and the tax treatment of that income to the person who owns them. This disadvantage will go away at the same time the passthrough provisions work for small business turning their distributions into, effectively, corporate earnings even though they go to you as an individual. Expect a significant move in the share price of these companies, most of which are pipeline operators and similar, if this provision looks to survive. If you want an actionable gamble (“trade”) on the plan as-spoken yesterday this is where you find it but you have to gamble before it becomes apparent that the plan will actually pass since the minute that becomes known in the market the price will step-shift upward on these shares.

The repatriation “holiday” on corporate funds will do nothing to help economic output. Sorry, that’s the facts folks. Trump will get a big fat zero out of this because they money will go to buybacks, which produce nothing. That’s the history on this sort of “holiday” provision and there’s utterly no reason to believe it will be different this time. Money is fungible; you cannot prevent this from happening. For another example of why this is inevitable look at the so-called “benefit” for education out of state-run lotteries; yes, the funds go there but nothing prevents the state from taking other funds they would have spent on schools and reallocating them — which they do.

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