Amid the ongoing controversy and gridlock in our nation’s capital, skepticism abounds regarding Congress’ ability to deliver any substantive legislative victories—and for good reason. Following the implosion of health care reform, successful tax reform seemed more unlikely than ever. However, recent developments indicate that change may be on the horizon. During the week of September 11th, the Trump administration signaled its willingness to work with Democrats to secure passage of a three-month debt limit and government funding extension. This will, in essence, “clear the decks” for tax reform.
The White House and Congressional Republicans are expected to release a detailed framework of their plan during the last week of September. Most of the current focus is on corporate tax reform to increase the economy’s competitiveness and incentivize companies to repatriate cash held abroad. However, we expect legislation will also tackle personal taxes and deductions. This could have implications for pass-through entities, such as limited liability companies and S corporations, in which many of Balentine’s entrepreneurial clients hold their businesses.
Rather than making piecemeal changes to the tax code, the Trump Administration would like to enact comprehensive tax reform, addressing the complexities and inefficiencies of the entire tax system. This is a tall order, seeing as the tax code has not been reformed since President Reagan signed the 1986 Tax Reform Act into law.
Much has obviously changed in the past 31 years:
- The tax code has grown from fewer than 30,000 pages to more than 70,000 pages,
- The United States’ corporate tax rate is now the highest in the industrialized world; and
- The number of credits, loopholes, and deductions has increased by 44%.
While this complexity is good for CPAs and tax attorneys, it certainly makes life more difficult for the rest of us!
This level of tax reform may have significant implications for the financial plans of all business owners, especially those in the process of selling or pulling equity out of their business. The reaction of bond and stock markets will likely cue off whether any legislation truly achieves the long-run benefits of tax simplification in a deficit-neutral manner, or whether it ends up merely being a short-term stimulus in the form of a tax cut which will add to deficits in the future. While a tax cut will help to boost earnings expectations for 2018, such a boost to stock market levels could be offset if bond markets increase long-term interest rate expectations from higher levels of debt expected in the future.
Treasury Secretary Steve Mnuchin has expressed a desire to “get [tax reform] done by the end of the year” and possibly backdate it to the start of 2017 in order to boost the economy. Republican leaders are aware that if they do not secure a major legislative victory in the coming months, they may face repercussions in next November’s mid-term elections. Indeed, some pundits are already predicting a Democratic sweep. Passage of tax reform is sure to be a bumpy road with a great deal of horse trading. Though we ultimately may not see as aggressive or comprehensive a strategy as Secretary Mnuchin has hinted in recent times, we expect that politicians will do what they must to better position themselves for re-election by getting something agreed to by early next year.
Given the significant implications of tax reform on business owners and capital markets, Balentine is closely following all developments. We look forward to sharing our thoughts in a series of focused blog posts in the coming months. Do you have a question about tax reform that you’d like us to address? Please send it to email@example.com or speak with your relationship manager.