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Letter from the US: 'You all just got a lot richer??for now

By Scott McCulloch

Last Christmas came early for millions of Americans when US president Donald Trump signed a $1.5 trillion Republican tax reform bill into law. “You all just got a lot richer,” Trump told wealthy friends at his private Florida club after endorsing the first major overhaul of US tax laws in 21 years.

Hardly a tactful quip, but when has Donald Trump fretted over tact? Analysts say the president may be $15 million personally better off.

The tax reform package includes a cut in the corporate rate from 35% to 21%, with about 80% of US households due to pay less in 2018. Most Americans will benefit from the reforms, but cuts for the working and middle class expire in 2025 while those for corporations will not.

The nonpartisan Tax Policy Center predicts nearly three-quarters of the savings from reforms would go to the top 20% of earners, those making more than $149,000. More than half the savings would go to the top 1%, people who earn more than $732,800.

Another aim of the legislation is to stop America’s biggest multinationals hoarding trillions of dollars offshore and invest at home instead.

As tax experts digest details of Trump’s reforms, opinion in family firm circles has been strident. Small family businesses will benefit, but bigger businesses, and those which pay 66% of the estate tax income, will not.

Under current law, profits from a small business “pass through” to the owner and are taxed at an individual rate, which can be as high as 39.6%.

Jennifer Muntz, executive director of Family Business Network North America, says the new tax treatment of the “S Corp” and “C Corp”—legal terms that define how taxes are applied to firms or individuals—has significant implications for family businesses.

A C Corp is taxed separately from its owners. An S Corp does not pay federal taxes at the corporate level. Any income or loss is “passed through” to shareholders who report it on their personal income tax returns. Losses, meanwhile, can offset other income on shareholders’ tax returns.

“The reduced tax rate makes C Corps more attractive for businesses and investment activity because of the significant savings,” says Muntz. But she cautions: “Some families with pass-through entities will need to carefully analyse the possibility of converting to a C Corp.”

As for owners of C Corps, Muntz says the reduced tax rate will affect their corporate deductions.

“It would be wise to examine shareholder-employee salaries verses dividend payments.”

Pat Soldano, founder of the Policy and Taxation Group, sees two sides of a coin.

“Since many family businesses operate as pass-through entities, they will be helped with the ability to deduct some of their income,” she says.

“But they did not get the same reduction in tax as regular and publicly-held companies.”

Soldano, who sits on the board of lobby group Family Enterprise USA, notes that family businesses also pay estate taxes. Publicly-held businesses do not.

“This means family businesses are competitively disadvantaged once again.”

At least there is scope for economic benefits. Goldman Sachs predicts an annualised GDP boost of 30 basis points in 2018-2019. The US Treasury says the bill will bring in $1.8 trillion in new revenue and projects economic growth of 2.9% a year on average. It assumes the rest of Trump’s plans—infrastructure spending, deregulation, and welfare reform—will be implemented, so who knows how much growth will emerge?

Peter Barakett, president of Due Diligence Consulting, is hopeful: “I’ve noticed an increased level of optimism about the growth of the US economy despite apprehension about the president on a personal level,” he says. “The most common negative comment I have heard is the inability to deduct more than $10,000 in state and local sales and property taxes.”

Unfortunately, the tax reforms will drive deficit growth. By how much? About $1 trillion over the next decade, according to the Joint Committee on Taxation. Somewhat reassuringly, the body predicts reforms will increase tax revenue growth by 0.7% annually, offsetting revenue loss from the $1.5 trillion in tax cuts.

Yet the reforms could move the Federal Reserve to raise interest rates faster than it anticipates, minutes of its December meeting show. Lower taxes mean Americans will have extra cash to spend, which is good. How much more they decide to spend is uncertain.

The Trump administration’s decision to add a significant amount of debt through the tax legislation could leave the country broke. The national debt stands at $20.1 billion—neck and neck with the entire EU.

Remember the debt-ceiling crisis of 2011? There are audible voices in Washington D.C. who say another is on its way. Combine that with the prospect of rising interest rates and Trump’s tax reform package could swiftly undermine the consumers it seeks to relieve.

How would that be for business? In Trumpian parlance: “Bad. Very bad.”

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