Donald Trump’s surprise victory in the November presidential election sent U.S. markets on a tear upwards. The Dow Jones Industrial Average surged over 1,500 points,1 the S&P 500 has rose over 100 points,2 and the U.S. Dollar Index rose over 5%.3 While this so-called “Trump Rally” is premised on a combination of several expectations, including lower regulatory burdens and protectionist policies, one of the most significant factors is undoubtedly the President’s proposed changes to the taxation of businesses. If adopted as proposed, these changes will significantly reduce the tax burden on businesses and reduce the incentive for corporations to move their headquarters’ overseas or move profits offshore.4 With a Republican-controlled Congress that seems amenable to many (or most) of the new President’s proposals,5 expectations about the taxation of businesses during the Trump administration are likely a significant reason why investors suddenly have a much higher valuation those businesses.
During his campaign, Donald Trump proposed reducing the income tax rate on “businesses” from 35% to 15% and eliminating the corporate alternative minimum tax (AMT).6 It’s somewhat unclear which businesses will enjoy the 15% rate, but the campaign website’s reference to “all businesses” suggests inclusive application.7 Paul Ryan and the Republicans in the House, where all tax legislation must originate,8 have instead proposed a 20% rate on corporate income.9 Given Republicans’ thin majority in the Senate,10 which must also approve the changes, Congressional Republicans would appear to have real bargaining power in crafting tax legislation with the Trump administration. In any case, a business tax rate of 15-20% represents a huge reduction from the current 35% corporate rate and itself would reduce the incentive for businesses to move themselves or their cash offshore.11 Additionally, both President Trump and House Republicans appear to agree on repealing the 3.8% Obamacare tax on investment income.12
In addition to simply reducing the tax rate paid by businesses, both the President and House Republicans have proposed allowing certain businesses to immediately deduct the cost of capital expenditures rather than recovering those costs over time.13 By separating the costs of producing income from the taxation of that income, this proposal is a departure from the traditional approach to such investments. As such, this “front loading” of capital expenditures for tax purposes is intended to incentivize such activity by increasing the net present value of capital expenditures.
These pro-business proposals have been alternatively praised as pro-growth policies14 and condemned as needless benefits to wealthy corporations that will do little to stimulate economic growth.15 Criticism of Donald Trump’s business tax proposals becomes more intense when combined with his individual income tax proposals, which are seen by many to explode the U.S deficit while primarily benefitting wealthy individuals.16 Regardless of the conclusion to be drawn, American businesses appear poised to realize significant reductions in their tax liability during the Trump administration and, since Republicans control both Houses and the White House, businesses should start planning now to capitalize on these probable changes to the tax law.
Historical Quote Data for Dow Jones Industrial Average, YAHOO! FINANCE, http://finance.yahoo.com/quote/^DJI/history?period1=1478494800&period2=1481864400&interval=1d&filter=history&frequency=1d. ↩
Historical Quote Data for S&P 500, YAHOO! FINANCE, http://finance.yahoo.com/quote/^GSPC/history?period1=1478494800&period2=1481864400&interval=1d&filter=history&frequency=1d. ↩
Historical Quote Data for U.S. Dollar Index, MARKETWATCH, http://www.marketwatch.com/investing/index/dxy/historical. ↩
Linette Lopez, Trump’s Tax Plan Could Knee-Cap A Bunch of Huge Companies, BUSINESS INSIDER (Dec. 19, 2016), http://www.businessinsider.com/trumps-tax-plan-could-knee-cap-a-bunch-of-huge-companies-2016-12. ↩
See Robert Donachie, A Comprehensive Look At President-Elect Trump’s Tax Plan, DAILY CALLER (Nov. 13, 2016), http://dailycaller.com/2016/11/13/a-comprehensive-look-at-president-elect-trumps-tax-plan/. ↩
DONALD J. TRUMP FOR PRESIDENT, INC., Tax Plan (last accessed Dec. 19, 2016), https://www.donaldjtrump.com/policies/tax-plan/. ↩
U.S. Const. Art. I, § 7, Cl. 1 ↩
Lynnley Browning, Trump’s Tax-Cut Plans May Draw Congress to Art of the Deal, BLOOMBERG (Nov 9, 2016), https://www.bloomberg.com/politics/articles/2016-11-09/trump-s-planned-tax-cuts-may-draw-congress-to-art-of-the-deal. ↩
BALLOTPEDIA, United States Senate (last accessed Dec. 19, 2016), https://ballotpedia.org/United_States_Senate ↩
See Kyle Pomerleau & Emily Potosky, Corporate Income Tax Rates Around the World, 2016, TAX FOUNDATION (Aug. 18, 2016), http://taxfoundation.org/article/corporate-income-tax-rates-around-world-2016, for a comparison of corporate income tax rates around the world. ↩
DONALD J. TRUMP FOR PRESIDENT, INC., Tax Plan (last accessed Dec. 19, 2016), https://www.donaldjtrump.com/policies/tax-plan/; Browning, supra note 4. ↩
DONALD J. TRUMP FOR PRESIDENT, INC., Tax Plan (last accessed Dec. 19, 2016), https://www.donaldjtrump.com/policies/tax-plan/; THOMSON REUTERS TAX & ACCOUNTING, Things to come? A Look At Trump’s and House Republicans’ Tax Proposals (Nov. 11, 2016), https://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/things-to-come-a-look-at-trumps-and-house-republicans-tax-proposals/. ↩
Rex Sinquefield, Trump Pro-Growth Plan Simplifies Tax Code, Steers Economy To Greater Opportunity For All, FORBES (Aug. 12, 2016), http://www.forbes.com/sites/rexsinquefield/2016/08/12/trump-pro-growth-plan-simplifies-tax-code-steers-economy-to-greater-opportunity-for-all/#7aca1857cf6a ↩
Compare Rex Sinquefield, Trump Pro-Growth Plan Simplifies Tax Code, Steers Economy To Greater Opportunity For All, FORBES (Aug. 12, 2016), http://www.forbes.com/sites/rexsinquefield/2016/08/12/trump-pro-growth-plan-simplifies-tax-code-steers-economy-to-greater-opportunity-for-all/#7aca1857cf6a and Craig Harrington & Alex Morash, Experts And Critics Tear Apart Trump’s Recycled Tax And Economic Policy Reforms, MEDIA MATTERS (Sep. 15, 2016), http://mediamatters.org/research/2016/09/15/experts-and-critics-tear-apart-trump-s-recycled-tax-and-economic-policy-reforms/213118. ↩
H.C., Donald Trump’s Tax Plan Is A Fantasy, THE ECONOMIST: DEMOCRACY IN AM. (Sep. 28, 2016, 2:47 PM), http://www.economist.com/blogs/democracyinamerica/2015/09/trumponomics. ↩
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