This is the second of a series of articles about how the demand for legal services might change over the next two years under the Trump Administration. This article focuses on the effects of proposed changes to taxation.
As we began to unpack in our last post, the potential labor, product cost, and tax impacts from a second Trump administration could be significant on both a federal and state level in the U.S. if proposed immigration reforms are passed. In addition to changes in immigration policy, national and international tax burdens are projected to increase on households and business in the U.S. and abroad. Here, we will discuss some of the main points firms should be aware of to support their clients during the coming years.
What We Will See in the U.S.
With the second Trump administration set to begin in a matter of hours, many in the economic know anticipate that Trump will continue many, if not all, of the features under the Tax Cuts and Jobs Act (TCJA) that were set to expire in 2025. TCJA boasted a lower federal income tax rates for U.S. taxpayers across all income brackets. Though the Personal Exemption was eliminated, TCJA made up for it by doubling the Standard Deduction those filing singly and jointly could claim.
However, State and Local (SALT) Deductions were capped at $10,000; depending on the cost of living for the region, the SALT Deduction has the potential to reduce the over all tax burden for those living in a higher area median income level. If the taxpayer lives in an area that does not have a state tax, this benefit offers little value. It is important to note that this deduction cap is set to expire in 2025 without Congressional intervention.
Trump’s proposed cabinet has always promoted prosperity through lower taxes, especially taxes paid by corporations. Trump has suggested lowering corporate tax rates from the current 21% to 15% for corporations that produce goods and services in the U.S. The goal, of course, is myopic: Low corporate tax rates attract more businesses to produce goods and services in the U.S. And this theory seems to be holding true in the tech sector; the burgeoning good for tech companies are meant to attract manufacturing and agribusiness to the U.S. to enjoy similarly low rates.
Large corporations are not the only business entities a second Trump Administration holds a soft spot for. Individuals and trusts receiving pass-through business income can deduct a lesser amount of tax based on either 20% of the over all qualified business income (QBI) or 20% of the individual’s taxable income, minus any capital gains of course. Again, the goal runs on the same one-track: Encourage business growth, hopefully in the form of entrepreneurship under this tax benefit.
Economic Implications of Tax Cuts
Cutting taxes encompasses a wider scope than just what an individual keeps in their pocket at tax season. Lower taxes for corporations reduce the amount of contribution businesses make to the communities they function in. And less revenue in the form of taxation has the potential to increase national debt, as more must be borrowed to cover cost in absence of revenue to fund government work.
The government relies on bonds to recover costs to pay debts; bonds can be issued to cover a variety of debt from infrastructure projects to federal operations to local needs. The more the market is flooded with bonds, the less valuable those bonds become. The less valuable the bonds are, the less likely they are to attract investors. If the government cannot attract an investor to back the bond, it will resort to increasing interest rates to make bonds more attractive to investors. Thus, the first signs of financial stress become evident.
Congressional Support
With control of the House and Senate, Trump could have generous latitude to implement his administration’s proposed tax policies. The reaction with the U.S.’s financial industry is to brace for potential volatility resulting from significant tax cuts: Increased interest rates, lower yield bonds, and less revenue for social application.
So…What’s the Problem?
Most of the anticipated problems occurring from tax changes under the Trump administration are purely speculative. It is impossible to know how the economy will respond until we have already committed to walking the path. One dilemma is evidently clear to economists, professional and armchair alike: Will the proposed cuts increase the federal deficit, resulting in a reduction of programs and services to U.S. citizens? Only time will tell.
However, a reduction in tax revenue collected is certain to result in increases to state and local taxes and an increase on prices of products and services to compensate for the loss of support normally received through tax revenue.
Conclusion
Because of the complexity of navigating these tax rules, the Trump administration has irrevocably increased a need for competent tax attorneys to help their clients navigate this new landscape and not miss benefits they are entitled to along the way.
It is important to remember that these are only projections; not actual policies have been implemented as of this writing. Speculation on a proposed policy change varies widely from the actual effects of implementation. Actual impacts are driven by the specifics of the policy and how the economy is performing at the actual time it is implemented.
For support reviewing how proposed changes to U.S. tax policy could affect your law firm's needs and expectations for legal services, contact Walker Clark for a complimentary 30-minute consultation. We can review the question with you and propose a plan of action to ensure that you and your clients will be ready to navigate and comply with any changes that arise.
Sarah Max
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