Unsung Winners and Losers of the Republican Tax Plan By: Gabriel PotterMBA, AIFA® 2017.11.07

The House Republicans unveiled their proposed tax plan last Thursday.  There will likely be some revisions to this plan – since the Senate republicans have yet to make their own version and then attempt to reconcile both versions into viable legislation – but the broad strokes in the plan are likely to be pretty consistent between both houses of Congress.  In short, it’s going to cut tax bracket rates for most households and sharply cut business tax.  Tax cut math is pretty simple.  If you want to cut taxes for individuals and businesses, you either have to raise taxes elsewhere, cut spending, or increase deficit borrowing.  The Republican plan seems to lead on the latter two solutions, cutting benefits widely (e.g. health, education) and increasing the deficit by another $1.5 to $2 trillion dollars.

There are dozens of think-pieces from leading media outlets about the consequences of the Republican tax plan.  We assume most readers know the broad strokes of the bill, who is mostly likely to benefit and who is going to lose out.  There are plenty of places to go online to figure out your own tax bracket and figure out how much less the Federal government is going to charge you as an individual or joint filer.  Instead, we’d like to focus on some of the unanticipated consequences of the bill – the winners and losers who aren’t getting as much attention given how broad the impact of the bill will be:

Winner:  Pass-through businesses.  We all know that corporate taxes are cut to 20% in this bill.  That’s certainly news, but did you also know that small businesses (and savvy individuals working with tax attorneys) can take advantage of the 25% tax rate on pass-through businesses to even reduce their federal tax bill.  Another winner from this bill are tax attorneys or anyone with the knowledge to restructure large personal finances into pass-throughs.

Loser:  Home builders and realtors.  We know individuals won’t be able to buy expensive homes with as much tax assistance since the proposed plan caps mortgage deductions for new homes at $500,000.  We’ve already argued for the wisdom of this move in a previous blog post, despite the impact to home prices which are artificially supported by this subsidy.  However, it is wrong to pretend there won’t be dislocations from removing the subsidization of expensive homes for builders and the secondary housing market. 

Loser:  High-tax states.  Individual Californians and New Yorkers offset their state and local taxes from their federal bill.  The new plan caps the deductions individuals can take, so more money now flows to the federal government instead of state and local programs.  Sure, this is bad for individual tax-payers in these states, but the impact to state finances has been largely ignored.  High-tax states usually have high pension liabilities and other earmarked spending; this plan can jeopardize municipal debt ratings, public projects, and state finances across the board.  

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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