Last month, in the aftermath of the presidential election, we offered some thoughts about how investors should think about the uncertainties of a new administration. But we now know a lot about who President-elect Donald Trump proposes to put in key positions, and of course about some of what he has proposed that will directly affect the economy.
Some of this will be under the new president’s direct control. Other matters depend on what Congress does with his budget and tax proposals.
One very important policy issue involves the Securities and Exchange Commission and its makeup under a Trump administration. In recent news analyses, The Wall Street Journal has projected that newly appointed SEC members will likely reverse some Obama administration policies that affect the stock, bond, and commodity markets.
High on that list are various rules put in place after the 2008-09 financial crisis, notably under the Dodd-Frank Act. Where expert observers have to admit some uncertainty, though, is how the likelihood of business-friendly regulators paring back some of those rules stacks up against what Trump had to say during the campaign. Many of his public pronouncements were highly critical of Wall Street and financial elites. They were targets of campaign rhetoric about Wall Street’s negative impacts on ordinary citizens and small businesses.
So, will the SEC’s enforcement regime change under the Trump administration? Probably not, the Journal predicted. What is more likely is that initiatives from the past eight years of a Democratic administration will be reversed, such as limits on compensation for corporate executives.
Another prominent Trump promise was to reform the federal tax code. While just about anybody in Congress, on either side of the aisle, will say they want to do just that, the particulars – whose favorite loopholes get closed, and which arcane provisions remain in place – have the potential to create hundreds, if not thousands, of bitterly fought battles.
That means that actually rationalizing and simplifying the tax code, which everybody favors in principle, may be less likely than changes to the basic rate structure. And that is what lies at the core of Trump’s tax proposals.
- Reduce marginal income tax rates for everyone, both, individuals, and corporations. That would leave just three individual tax brackets, at 12, 25 and 33 percent of ordinary income. Capital gains brackets would remain unchanged at zero, 15 percent and 20 percent. The standard deduction would more than double for individuals and couples, but personal exemptions would be abolished. Itemized deductions would be capped at $100,000 for individuals and $200,000 for couples.
- The corporate tax rate would be reduced from 35 percent to 15 percent. What remains unclear is whether that would apply to all businesses or just those “C” corporations that pay income taxes directly. Under current law, other types of business, “S” corporations and partnerships, pass income directly to their owners, where it is taxed at their individual rates.
- Abolish what remains of the federal estate tax. In its place, beneficiaries would be subject to income tax on gains on inherited assets if and when they are sold, but only above $5 million for individuals and $10 million for couples.
- Repeal the Alternative Minimum Tax, which was first enacted to ensure that despite loopholes the wealthiest individuals and corporations can’t completely avoid federal taxation. Inflation over the last several decades has meant the AMT is now catching more and more taxpayers with moderate incomes, making it increasingly unpopular in Congress.
- Repeal the “Net Investment Income Tax” or NIIT, which is now 3.8 percent.
- Tax so-called “carried interest” at ordinary income tax rates, a proposal specifically aimed at certain ultra-high-income Wall Street types such as hedge fund managers.
Economists who have analyzed these proposals project that they would reduce federal revenue by $6.2 trillion over ten years, and add $7.2 trillion to the federal deficit. Those numbers could, of course, be reduced by cuts to federal spending. But history tells us that, whether enacted by Republican or Democratic majorities in Congress, tax cuts have never been fully offset by spending cuts. The president-elect has argued, of course, that his proposals will spur sufficient economic growth to more than make up for anticipated revenue losses.
At the individual level, the Trump tax plan would save moderately high-income people – those in the bracket between $143,100 and $292,100 – an average of $4,300 a year. For the top tenth of one percent, those earning more than $3.8 million, the tax savings would average $1.07 million in 2017.
The Republican leadership in the House of Representatives has proposed its own tax-reform package, which shares many but not all of the Trump proposal’s features. Its impact, economists have projected, would be to reduce federal revenue by $3 trillion over ten years, adding $3.1 trillion to the federal debt. The House proposal would save those moderate-income ($143,100-to-$292,100) taxpayers far less than the Trump plan, just $340 a year on average. But the top 0.1 percent would come out even better, saving an average of $1.2 million each.
While both Republican and Democratic leaders in Congress have said they expect to be able to enact some version of tax reform in 2017, the devil is always in the details. Expect Democrats to put up stiff resistance to any plan that benefits the top 1 percent more than those in the middle. And, unless both the White House and Congress can find common ground on the specifics, the status quo may remain in place for the foreseeable future.
So, watch for anything being proposed as genuinely “bipartisan,” which may have a reasonable chance of becoming law. On the other hand, proposals that may appeal to the middle might also attract opposition from the most extreme wings of either party.
One other factor that’s worth keeping an eye on in the future, depending on what Congress does, is how it would affect inflation rates. And if inflation starts to creep up, the Federal Reserve would almost certainly raise interest rates. The Fed has already projected that it will bump up rates in three increments next year. So, anything that will speed up the economy is likely to affect interest rates, which in turn will affect bonds and some other financial markets.
In the meantime, when it comes to adjusting your individual tax and investment strategies, we’ll always advise remaining flexible and open to a wide range of possibilities. Remember, as we said last month, the most certain thing when it comes to government is uncertainty
Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends. The information contained in these publications is intended to provide general information about issues related to trust, investment, and estate related topics. Readers should be aware that the facts may vary depending upon individual circumstances. The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.