Trump’s proposed tax plan: Has he no shame??

 


It is almost incredible that this new tax plan so transparently benefits Trump and his cohorts. Has he no shame?

Many of his largest donors, such as Carl Icahn, (along with Trump and his kids) have business tax structures that will be uniquely benefited by this tax proposal. Simply by having what are called “pass through” entities, they will qualify for this new 25% rate, which is incidentally a marginal bracket about the same as an average wage earner. Even if the pass-through income is in the millions (which it may well be in Trumps’  own case). And, of course, the average wage-salary earner will not be able to use this tax structure. However, it is simple to restructure business entities to qualify as pass through entities. If you are working for a boss, not so easy.

We wouldn’t be surprised if many high earning executives opt to become independent contractors, attempting to set themselves up as “pass through entities” in order to game the tax system.

Trump tried hard to get rid of the alternative minimum  tax (“AMT”). This tax was designed to snare those avoiding income taxes by claiming outsize tax deductions, such as depreciation on real estate and interest on real estate loans. This perfectly describes Trump’s portfolio. The AMT survived in the final passage, but in a form far less onerous to the folks likely to be affected by it. Although Trump wails against the AMT, it was the most effective tool developed to prevent the exploitation of loopholes in the tax law.

Let us clarify that feature. Say you purchase an income producing building, such as a hotel, for 35 million dollars. You do it with borrowed money. Maybe you put up only 5 million dollars. You get to depreciate the building by over 1 million dollars a year ((based on its’ total value, not what you have ‘at risk” (a relatively small sum)).and you are able to take the  “loss” of this $1,000,000 on your tax return, even as the property goes up in value.. You also get to deduct all the interest on the 30 million dollar loan used to buy the property. That is a couple of a million dollars right there. So even if the building generated a million dollars of net profit, you would get to pay no income taxes on that money. And you would get to shelter other, totally unrelated, income from taxes too. Basically, by having sufficient real estate investments,  you could have arranged to pay zero income taxes on millions of dollars of income, but for the AMT, which did require some tax payment, even if smaller. (No wonder why Trump wouldn’t release his tax returns!) The AMT still stands, though effectively weakened, as a modest defense against those who seek to exploit our tax code, after the recent passage of the new law.

Trump and his cohorts can still get rid of some of their real estate, exchanging it, like exchanging an apartment complex for a hotel, for example? No problem, just use tax code Section 1031, and voila, you get yourself an instant upgrade without paying a penny of capital gains tax. And again, under the Trump proposal, when you pass away, your beneficiaries can sell it off paying not a penny of capital gain taxes either, after having paid a far reduced estate tax.

Until the introduction of the AMT, many multi-millionaire real estate investors like Trump (and mine and oil drilling and oil well investors too) were paying virtually nothing in income taxes. The alternative minimum tax was introduced to prevent folks like Trump from paying close to nothing, in income taxes. Of course Trump is on record for hating this tax and  of course he wanted to get rid of it entirely, as the AMT has put a big monkey wrench in  his personal tax situation. (It is really easy to see why so many in the oil and gas industry was supporting Trump’s tax law, ditto the commercial real estate industry.

So, if you are president, why not help yourself to all the personal benefits that you can? So the original proposal did end the AMT. We are curious why the Republicans didn’t go along with Trumps’ original desire, and the initial cut of the tax law, that completely ended the AMT? We can only imagine that they are worried about the next election cycle, as the truth of this tax law seeps down to the “masses,” and the inevitable recognition slowly occurs, that the Trump base was deluded in believing that this tax law was for their benefit.

Another negative feature aimed directly at the “middle class” is the $750,000 loan limit  for residential mortgage interest deductibility. . In so many markets, a reasonable home for an upwardly mobile family of five or six, costs more than $750,000. To rich folks, coming up with the cash to keep their mortgages (if they need one at all) to $750,000 is no problem. To upper middle class folks, it can be a hardship. And please note how tax deductible  interest on commercial mortgages, the kind Trump has plenty of, has not been limited at all.

Ending the “death tax” (estate tax) is an incredulous feature of the original Trump proposal. This would not have helped anyone not in the $5+ million dollar, net worth,  if single, and $10+ million, net worth, if married, categories. And of course it would have added to the deficit. The Trump argument was that it will stimulate the economy and create jobs. And one can at least see how the funeral business will be benefited because multimillionaire families can opt for more lavish funerals knowing that they don’t need to pay  a “death tax”.

In fact, the law did pass, but with a modification. There will still be an estate tax, but it will effect far fewer rich people than the old one. it doubles the exempted amounts to $10 million if single and $20 million if married.

What is not clear is how gifts will be taxed. Now, a couple can give away over 10 million dollars without paying any gift tax. If this new arrangement ends the gift tax entirely (which has always been linked to the estate tax) than any talk in a future administration of re-instituting gift or estate taxes, may stimulate massive gifting ahead of any reversion back toward prior tax law.

Merely by setting up a special type of trust, and tax free transferring (gifting)  real estate, or other, assets, to it, one could easily shield multi-billion dollar fortunes from any future re-institution of an estate tax. These type of trusts could be widely used, because they can be structured to be flexible enough to permit re-investments, like purchasing new real estate, private homes, luxury cars, yachts, jet planes, condos, or anything else that could be used by the taxpayer. All assisted by IRS Section 1031. And the cash flow from these trusts can be legally distributed, tax free, due to the depreciation tax benefits,  to the beneficiaries, which would include Donald Trump and his family. The taxpayer wouldn’t have to “own” the asset to get all the benefits of ownership. By the way, Trump claimed to be an expert on using the tax code to his advantage, so he surely knows this stuff, even if he doesn’t know anything else.

Watch this carefully, as linking the reduction of estate taxes to the gift tax, will mean that a future government will never be able to retrieve any taxes from these $20 million and below estates, all while US deficits continue to grow. Wealthy folks will simply gift their assets to irrevocable trusts or family members (if they hadn’t already done so) at the mere talk of re-instituting any new estate-gift tax regime.

And finally, watch carefully if the step-up in basis rules, which now exist, will remain.

The last iterations of estate tax law, opted to modify the step-up rules In the original, years ago, attempt to end the estate tax in the Bush administration, an idea was instituted to “carry over” basis of property at death, which meant that the beneficiaries of heavily appreciated assets would pay a capital gain tax on gains from the decedent’s original cost,  upon a later sale or liquidation of those inherited assets. Tax legislators realized that ending the estate tax while also permitting beneficiaries to not pay a tax on gains of long held property seemed an unfair advantage. Basically, a wealthy family would be further enriched by the death of its’ patriarch, because it could than finally liquidate the assets absent any income taxes. Income taxes that would have been due had assets been sold prior to death.

The concept, which was in effect for a few years, proved  unworkable, as recalling basis of assets acquired long ago was very complex,  not practical and sometimes impossible. . But that was the Republican compromise when they originally tried to end the “death tax” completely back than. It just smacked of too much unfairness, that is to allow the ultra rich to pay zero taxes on highly appreciated property, merely by holding on to it till death, when it  than could be sold by their beneficiaries. The republicans did succeed in enormously raising the exemptions, so many fewer folks than had to worry about estate taxes. And they were able to retain the step up in basis rules. Now  the exemptions will shelter over 10 million dollars per individual, and if married, over 20 million dollars.

As mentioned, the step up rules now allow beneficiaries to sell those highly appreciated inherited assets, like real estate, while  not even incurring the capital gain tax.

Of course, Trump did not try to change these millionaire friendly step-up-in-basis rules. Not a word about this in the new bill. The continuance of the step-up in basis would mean that when Donald Trump dies, his beneficiaries, will pay estate taxes, but they would be able to sell off any or all of his real estate without paying a penny of capital gains taxes, even though the Donald got to deduct millions of dollars (interest and depreciation)  by owning the real estate while he was alive.

Finally, we ask, how does this substantial reduction in the estate tax stimulate the economy? Will these very rich people hire more workers just because they wouldn’t eventually have to pay an estate tax or a capital gain tax? More likely they will spend less and save more, knowing that they will be passing down so much of those savings. In short, this substantial reduction in the estate tax will simply increase the deficit and/or increase middle class taxation.The money to run our country has to come from somewhere.

Surely the darkest part of the original tax proposal was the Trump wish to end the medical deduction. Now expenses that exceed 10% of income can be deducted.  But nursing homes are expensive. Suppose your parent/parents wind up in one. Or maybe even you or your spouse. While the family stretches to afford it, probably in many cases depleting long saved funds in IRA’s, retirement accounts and other savings, that potential $100,000+ plus expense would not be deductible. This would increase long term care costs by over 30% in most cases. Many people will run out of money a lot sooner. Rich folks don’t have to worry much about this because long term care costs are a much smaller fraction of their income and net worth. We think that this was the most brutal aspect of the original Republican tax proposal, and truly mirrors Trump’s complete lack of empathy for other people. We note here that this provision was modified to continue the medical deduction. You can bet that a republican waive occurred when those constituents considered what was at stake for them if the medical deduction was to be eliminated. In fact, their protests probably led to a revision reinstituting the deduction, and even slightly enhancing it. You can absolutely bet that they were worried about the next election cycle.

We do hope  that Trumps’ push to have modified the tax code is eventually accompanied by new demands to see his own tax returns. Undoubtedly his tax proposal will save  his family (and cohorts) millions, while leaving the middle class holding the bag, their children inheriting unfathomable national debt..

Some simple calculations, while studying those tax returns,  will reveal his personal percentage dollar savings that can be attributed to this tax proposal. His “working men” constituents would be livid as they begin to understand this. Maybe than those constituents will see how conned they were. The public needs to renew its’ demand for Trump to release his tax returns!

11/22/17- critical update:

A critical component of the about to be voted on Republican tax law is the repeal  of the individual mandate in Obamacare. This virtually guarantees that Obamacare fails and that private health  insurance rates will skyrocket. Consider that the law also  ends the medical tax deduction (exceeding 10% of income), making these premiums not tax deductible. Just prior to Obamacare, a decent family health insurance plan cost upwards of $20;000 a year. At least these premiums have been  tax deductible. Now, absent the mandate, the premiums will surely be higher. And not deductible. This will  create real hardship for many Americans.

11/29/17: A shameless lie

Bos Trump actually said that this new tax law.will “cost him a fortune”. Of course this lie insults most experts who studied the available information. But now that the law passed, it is probably ultimately going to be true. Yes, he will save millions of dollars in  taxes in the very short term. (We know already that Trump is not a long term thinker).

But when it comes to hard earned money, his ardent average supporters will soon be able to see they were conned. After all, they do confront paying taxes each year. And when it comes to real money (not fake ideology) people tend to sober up quickly. Many will come to see that they gained nothing  for what they lost, or mainly they just lost. So, if by the word “fortune” one means credibility, trust, belief, honor, it will cost Trump all of that, and his collaborators will share in the cost too.

Let us caution our readers about one of Trump’s favorite negotiating tactics though. Trump starts negotiations with outrageous demands, which he knows rational counterparties would never agree on. Than he will yield on one or two of them, so the counterparty feels some sense of relief, and goes along with the rest.  It’s an old tactic, but it often works.

This tactic was likely employed in originally proposing ending entirely the medical deduction, and the placing of the mortgage interest deduction at the $500,000 level.

The $10,000 deduction cap on property taxes and sales taxes that prevailed will still injure that upwardly mobile middle class group who, in the majority, did not vote Republican.