Trump’s tax policy: Five topics you should have on your radar

1. Extension of Tax Cuts and Jobs Act of 2017

The signature piece of tax legislation in President-elect Trump’s first term has been the “Tax Cuts and Jobs Act” (“TCJA”); a fundamental reform of US tax law that inter alia lowered corporate and personal tax rates, doubled the child tax credit, changed the tax treatment of US-based multinationals and increased exemption amounts for the individual alternative minimum tax and the estate and gift tax. Due to specifics of the parliamentary procedure employed to introduce that law, many of the provisions on the individual tax side are only temporary, expiring at the end of 2025. As this would lead to a noticeable increase in taxes for a large part of the population (lower and middle income), an extension of these regulations has been the focus of the campaign’s tax discussions.

2. Further tax cuts

Trump proposes to lower the CIT rate, which had been reduced from 35% to 21%, even further to 15% for domestic manufacturing businesses. Bonus depreciation of 100% for qualifying assets might see a comeback, possibly limited to certain sectors like agriculture. R&D expenditures might again become immediately deductible instead of having to be capitalized and amortized over five and 15 years respectively. Tips income and overtime pay may become tax free. Many of these items are not part of a written concept but have been mentioned by Donald Trump at one of his electoral speeches. It is largely still unclear if there is indeed a serious intent to implement them and how this could be done. For example, in remarks to the Detroit Economic Club on 10 October, Trump proposed to make interest on automobile loans “fully deductible” from federal income taxes. However, he has offered no details since then on how such a deduction would be structured, considering that a deduction of interest incurred for private expenses is not foreseen by current US tax law.

3. Increase in tariffs

Most relevant for all cross-border business will be the question of how much of President-elect Trump’s plans to substantially increase income tariffs will actually be implemented. Suggested measures included a 10% to 20% tariff on all imports and a potential 60% tariff specifically targeting imports from China. He also proposed tariffs on vehicles originating from Mexico ranging from 100% to 200% as well as a 25% tariff on all Mexican exports to the United States. However, it is widely believed in the US that the Trump victory is largely due to consumers’ unhappiness with the steep increase in costs of living that occurred in the past years. Considering higher import tariffs will most certainly lead to another significant increase in consumer prices, it is uncertain if a broad increase in tariffs will indeed become reality. Mostly, it is expected that there will be only specific or maybe symbolic increases of tariffs on certain goods. Given that such examples might include, for instance, German car exports, consequences for business in Europe may nevertheless be significant. Discussions have not gone into much detail yet, therefore it also cannot be predicted to what extent measures employed – for example German automotive companies shifting production to the US - will mitigate the consequences of tariff increases.

4. Pressure for offsets for tax cuts

The costs for extending the expiring TCJA provisions are estimated at approx. 4.6 trillion USD over a period of ten years. Costs for additional tax cuts will add significantly to this number. In the current legislative period, calls for fiscal discipline have grown louder among lawmakers of both parties. It seems likely that some combination of business and individual revenue raisers such as base-broadening provisions will be considered.

5. Legislative procedure – budget reconciliation

Although Republicans reached a majority in both the Senate and the House of Representatives, they are not free to pass legislation in their favour unopposed. They could be stalled by means of the filibuster, a procedural tool that allows a minority of senators to block legislation that does not have a 60-vote majority in the Senate. Republicans hold only 54 votes. The budget reconciliation procedure is a means to overcome a filibuster in the Senate for certain pieces of legislation. This option comes with serious limitations. Most importantly, it must not increase the overall state debt over a period of ten years, meaning that measures for offsetting tax cuts or sunset provisions have to be included. Increased import tariffs, but also measures like the abolishment of renewable energy tax credits and tax credits for electric vehicles are discussed as part of a package to offset the costs for extending the TCJA provisions.

Summary

The coming two or three months will see decisions of extreme importance to many European businesses. While there is no way to be certain with the sometimes unpredictable Trump administration, it is widely held in the US that the “worst case” of a broad increase in import tariffs will not materialize. Most of the discussion on taxes in the electoral campaign revolved around tax relief for individuals, especially concerning average income households. Still, the need to raise funds to offset further tax cuts will be great and may also impact the decision on tariff matters.