President Trump recently unveiled his 2017 tax plan.
And so far, it looks as if it could help drastically lower tax rates for businesses, reduce the number of income tax brackets for individuals, and help create larger standard deductions.
According to CNN Money, the plan would shrink the number of rates from seven to just three, with proposed tax rates of 12%, 25% and 35%. However, the plan does allow tax legislators to add a fourth rate above 35% to make sure the tax code is at least “as progressive as the current system”.
Standard deductions could also double to $24,000 for married couples and up to $12,000 for single filers. The plan also calls for an expansion of the child tax credit, increasing its value from the current max of $1,000, and making it available to many more income groups.
As for business taxes, the proposal cuts the corporate tax rate to 20%.
That’s a significant drop from a current rate of 35% and puts us just below the average global tax rate of 22.5%. At the moment, small cap companies see an average tax rate of 32%, as compared to 26% for S&P 500 companies. That’s because they have less exposure to international tax havens.
However, should Congress be successful in reducing the corporate tax rates to 20%, small cap stocks could run even higher from where they are now.
There are also plans to drop tax rates on small businesses and other pass-throughs, which involve passing profits to company partners and shareholders, who then report earnings on individual tax filings. The top rate, according to the proposal would fall from 39.6% to 25%.
In addition, we could potentially see changes to how U.S. multi-nationals are taxed.
At the moment, multi-national companies pay a tax rate of 35% on overseas profits when they bring their profits back home. However, under the terms of the new proposal, we could switch to a “territorial system,” where overseas profits of multi-national companies would not longer be subjected to U.S. taxes, just taxes of the government where money was earned.
Such a plan could also encourage companies to repatriate a lot of that money, to invest in expansion, thus creating more jobs.
Current estimates put the total amount of cash held offshore at nearly $2.5 trillion.
Apple has held nearly $250 billion in cash, of which $230 billion is held outside of the U.S. Even Microsoft, Alphabet, and Cisco hold nearly $350 billion in cash, of which a great deal is held in offshore accounts. Should the new tax plan allow for repatriation at a lower tax rate, a good amount of that cash could potentially flood the U.S.
The last time we saw repatriation of offshore cash was in 2004, when 9,700 companies became eligible to bring overseas cash back at a rate of 5.25%, well below the 35% on profits earned overseas. At that time, of the 9,700 companies, only 843 took part, bringing home $312 billion, or about a third of cash held overseas.
So it’ll be interesting to see what happens should companies be given another tax holiday.
While the tax proposal will take a good amount of compromise from both sides of the aisle, markets seem enthusiastic about it. In fact, the Dow Jones recently hit a new high of 22,419 because of it.
Passage could send markets even higher, including many small cap names that The Cheap Investor has an eye on.