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Senate V. House 2017: What You Need To Know About Tax Reform

Eleven months after President Trump took office, Congress is unveiling its long-awaited tax plan.  Widely expected to inspire rounds of debate from both sides of the aisle, the main goal of the tax plan is to simplify the tax code and lower tax rates for corporations, the middle-class and for families.

While the House and the Senate embrace the idea of lower tax rates, simplification and relief for the middle class, there are still some things that need to be ironed out.

Both want to cut the corporate tax rate from 35% to 20%.

One of the biggest beneficiaries of the corporate tax rate cut to 20% could be the Russell 2000 and small-cap stocks.. At the moment, small cap companies pay an average tax rate of 32%, as compared to 26% for S&P 500 companies because they have less exposure to international tax havens.

The Senate wants to phase in the tax cut in 2019, which they argue could still provide an economic boost because companies could “accelerate capital investments into 2018 due to the plan’s immediate expensing write-off,” as noted by The Hill.

The House version of the bill would implement the tax cut in 2018.

They also disagree on the death tax.  The House would phase it out after six years, while the Senate would keep it in place and double exemptions.  It’s been argued that a full repeal of the death tax could grow the economy “by 139,000 extra jobs and 0.08 percentage points of GDP in the decade after elimination,”according to The Tax Foundation.

“The biggest disappointment is that the Senate won’t repeal the death tax,” says The Wall Street Journal. “This is a loss for economic growth and tax fairness, and it won’t deflect Democratic charges about tax cuts for the rich. A doubled exclusion to more than $10 million of estate value is nice, but the wealthy will still duck the tax by moving their assets into trusts or foundations—or sell businesses prematurely. All of this diverts resources from the productive economy, to the benefit of accountants and lawyers.”

The House has proposed consolidating the tax brackets from seven to just four, updating rates from 12% to 39.6%.  Those earning $20,000 to $30,000 a year would see a 13.6% reduction in total federal liabilities.  Those earning $50,000 to $75,000 would see nearly 8% reduction, for example.  Meanwhile, the Senate would maintain the current number of seven brackets, setting new rates between 10% and 38.5%.

In addition, the Senate version of the bill retains the current mortgage interest rate deduction cap of $1 million.  However, the House version would lower that to $500,000.

The Senate bill would also remove the SALT, or the state and local tax deductions.  The House bill would allow up to $10,000 in property tax to be deducted.

From this point, it all comes down to compromising and getting the bill to the President for his signature.

There’s still hope the tax plan can get done before year’s end, providing further upside for the stock market, especially for small cap stocks.  Stay tuned to The Cheap Investor for more.