In late April, President Donald Trump unveiled an outline for a comprehensive federal tax reform that is designed to simplify the tax code, cut tax rates for both individuals and corporations, while also eliminating many tax benefits for individuals.
President Trump’s proposal is only his suggested reform, and any change in the tax code would have to be completed by both branches of the legislature, but the outline did follow many of the tax-related promises President Trump made during the 2016 presidential campaign.
While President Trump supporters hailed the outline as a necessary reduction in the taxes Americans pay, Trump detractors suggest the plan would decrease federal revenues and increase the federal deficit by trillions of dollars.
Any actual tax code alterations are months, if not years, away. But Spectrem’s Investor Pulse thought it would be revealing to see how affluent investors feel about the proposals Trump put forth.
Spectrem surveyed 1,100 investors with a net worth between $100,000 and $25 million were asked to select the No. 1 priority among the suggested changes President Trump made. By a large margin, the suggested standard deduction increase for individuals was considered the most important change to the tax laws.
The standard deduction, which allows individuals to deduct a set amount from their taxes owed based on their marital status, would increase from $6,300 to $12,600 for individuals and married couples filing separately. The standard deduction for a married couple filing jointly would increase from $12,700 to $24,000.
Twenty-seven percent of investors said the standard deduction was the No. 1 change they would like to see made. That was more true for those investors with lower net worth (33 percent of those with a net worth below $500,000) as well as for Democrats (30 percent, to only 22 percent of Republicans).
A lower corporate tax rate was the No. 1 selection by 13 percent of investors, including 24 percent of those investors who identify as Senior Corporate Executives. The administration suggested cutting the top corporate tax rate from 35 percent to 15 percent.
President Trump suggested eliminating the estate tax, which only applies to people who are receiving more than $5.49 million in a transfer of wealth due to death. The current estate tax is 18 percent to 40 percent depending on how much is being transferred, but anything that exceeds the limit by $1 million is taxed at 40 percent.
Among the investors polled by Spectrem, 12 percent considered the elimination of that tax to be the No. 1 issue, but that response is obviously based on net worth, and even then only 16 percent of those with a net worth over $5 million considered that to be the No. 1 issue. However, when investors were asked to select all the tax issues they considered to be important, 58 percent of the wealthiest investors chose elimination of the estate tax, while only 41 percent of all investors did so.
The least popular move suggested by Trump was the elimination of tax on foreign business profits, with only 1 percent considering that to be the best idea. Only 4 percent considered lowering the top individual tax bracket as the No. 1 suggestion, and only 5 percent considered the elimination of itemized deductions for individuals as the best suggestion, even though that was offered as a way to simplify the tax-filing process, as so many people say they want.
When investors were asked to select all the tax changes they would like to see, the results were similar, but not identical, to the results of the No. 1 choice. For instance, the increase in the standard deduction was selected by 49 percent of investors, making it the most popular change, but 41 percent chose elimination of the estate tax, and 36 percent said fewer individual tax brackets would be a good idea. Only 31 percent chose the lower corporate tax bracket as a positive move.
As one might guess, responses were different based on the political leanings of the investors. The largest difference was in consideration of lower corporate tax rates, with 48 percent of Republicans saying it is a good idea and only 11 percent of Democrats agreeing. The suggested both parties can agree on is an increase in standardized deductions for individuals, and a corresponding elimination of itemized deductions.
Top Takeaways for Advisors
According to experts on both sides of the political spectrum, tax reform is going to take a long time to accomplish. However, it is likely to remain a topic of interest to investors, and advisors would be advised to remain vigilant on what is being discussed in Congress when the bill is being shaped.
The wealthiest investors are going to have the greatest interest in the estate tax decision, but all investors will want to know how their tax bracket might change. The investors who are corporate leaders are going to be watchful of the decisions about corporate tax rates as well.
©2017 Spectrem Group