By EDWARD McWILLIAMS//
Donald Trump was elected the 45th president of the United States on Nov. 8 after an election season that focused heavily on taxes – both the president-elect’s refusal to release his personal returns and his plan to change the U.S. tax code.
In addition to winning the presidency, the Republican Party also retained its majority in the U.S. Senate and the House of Representatives. With the president and Congress politically and ideologically synched, it’s more than likely there will be meaningful changes in the federal tax code during the next four years.
During the campaign, Trump offered what could be described as a general framework of a tax plan, including measures and changes he would like to see enacted. These included rate changes, limits on itemized deductions, elimination of tax credits, increased deductibility of childcare costs and increased equipment spending for businesses.
This plan has been attacked largely for being wholly unrealistic in terms of its total cost. The nonpartisan Tax Foundation has estimated it would cost $4.4 trillion to $5.9 trillion on a static basis – that is, without regard to the increased economic activity it may create.
Despite all the rhetoric, the executive branch cannot universally enact changes in the U.S. tax code. The U.S. Constitution delegates this authority to Congress, which, of course, is also Republican.
The new president’s wishes, ideas and desires will often be seen as a template for how Congress drafts tax legislation, but the commander in chief doesn’t have the authority to set tax law. So while Trump has an aggressive plan, it’s not likely to be the final version of what’s to come.
So, what will actually happen? In what seems all too rare in today’s politics, the most likely scenario will be a compromise of the initial Trump plan and what congressional leaders deem appropriate. There is a strong, vocal contingent of the Republican Party that’s concerned with increasing budget deficits, making the huge slashes proposed by Trump a non-starter.
Even though they’re the minority in both the House and Senate, the nature of politics and democracy makes it likely that Democrats will have some say in these final tax changes. Often, concessions are made to avoid Senate filibusters – it takes 60 votes to end them, and Republicans have 51, so there could be some unforeseen changes.
The exact details will still be subject to much debate. But it’s safe to assume there will be a broad reduction in individual rates – bringing them closer to the 2001 Bush tax cuts – along with a potential reduction in the corporate tax rate.
With disagreements on how to fund most of those other changes, and considering their nature, it’s unlikely there will be many more drastic changes in deductions and tax credits. Broad tax reform is certainly in play, but Trump will find it hard to rally support for that, especially early in his presidency.
The big question, then, is how should businesses and individuals plan. It’s a near certainty that 2017 and beyond will see both personal and corporate income-tax cuts, and this should allow taxpayers a further opportunity to take advantage of traditional planning techniques regarding the timing of their income and deductions in order to arbitrage tax rates.
Generally speaking, taxpayers should aim to accelerate their deductions in 2016, when they will be reducing income tax at a higher rate – and attempt to defer income wherever possible into 2017, when it would presumably be taxed at a lower rate.
Mr. McWilliams is a manager at Bohemia-based accounting firm Cerini & Associates LLP.