You’ve heard a lot about President Trump’s tax reform already. You’re going to hear a lot more, as bills materialize in Congress, lobbyists marshal their forces, critics pounce and everybody inside the Beltway hyperventilates.
You can follow the gory details, or tune out for 6 or 8 months, then come back around for the endgame. “They’re going to compromise on the math, and the politics will come together,” Mark Weinberger, CEO of consulting firm EY, tells Yahoo Finance in the video above. “My optimistic point of view is we will have a tax plan that will be very beneficial for business, with a rate in the low 20s, let’s say. By the end of the year, I think it very well could pass.”
The top federal tax rate on businesses is 35%, and Trump wants to slash it to 15%. A cut of that magnitude would be a huge boon for profits and stocks, but it would also swell the national debt, already $20 trillion. A more likely outcome is a corporate rate close to the average for developed countries, which is 25%. The average for all countries is 23%.
While the top US rate is 35%, few corporations pay at that rate, since they claim a take advantage of a buffet of deductions and other tax breaks that sharply lower the corporate tax bill in most cases. As Congress negotiates over lowering the rate, there will also be pressure to close many loopholes that let some companies whittle their tax bill down to the single-digits.
Many nations have a value-added tax, or VAT, which is similar to a national sales tax. That allows them to lower tax rates on corporate income, since they raise revenue in another important way. The United States has no VAT and isn’t likely to any time soon, because Republicans in control of Congress generally hate the idea. That will limit their ability to slash the corporate rate, however.
Trump has established general priorities for tax relief, says Weinberger, a veteran of Washington tax battles who was assistant Treasury secretary for tax policy during the George W. Bush administration. Trump wants to move to a territorial system, where multinational companies pay tax wherever they earn income, instead of paying US rates on income earned overseas. He wants to lower individual rates too, and eliminate the deduction for state and local taxes as a way to recoup some federal revenue lost to lower rates. “Now the politics come in, and we’ll see how much tolerance there is for eliminating the state and local deduction,” Weinberger says.
This battle will dominate Washington for months, and many analysts think there will be no deal until 2018, at the earliest. So Weinberger’s optimism could be premature. In which case, you won’t miss much if you check out for the next few months.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.