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Inside Trump’s Proposed Tax Reforms

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Framework for the tax reform

On September 27, 2017, the leadership of the Republican Party released the framework for its proposed tax cuts. The central idea of the Trump administration is to reduce the taxes paid by corporations and to simplify the federal tax code, despite the project effects on the federal deficit. The framework, however, does not give a clear picture as it only contains broad outlines. The tax-writing committee of US Congress will work on the finer details before the final bill is presented for approval.

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Highlights of the tax proposal

The framework for the tax reforms contains changes in the personal and corporate income tax code. The personal income tax highlights include the following:

  • a reduction in the number of tax brackets from seven to three, with rates at 12%, 25%, and 35%
  • an increase of the standard deduction from $6,350 to $12,000 for single individuals and from $12,700 to $24,000 for married couples
  • the elimination of the alternative minimum tax

The corporate tax changes include the following:

  • a lower tax rate of 20% (from the current 35%) and no corporate alternative minimum tax
  • full expensing of short-lived capital investment (equipment and machinery)
  • proposal to introduce territorial tax system, wherein overseas profits of US companies (DOD) would not be subject to US tax, if repatriated
  • a one-time window with a lower tax rate to repatriate overseas profits

Series overview

In this series, we’ll discuss these proposed tax reforms in detail in an attempt to understand which sectors in US equity markets (SPY) are likely to benefit the most, how bond (BND) markets could react to the possibility of a rising US deficit, and how the US dollar (UUP) demand could increase if US companies (QQQ) repatriate their cash holdings from abroad.

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