Trump's Plan to Overthrow the Tax System: What You Need to Know

Americans have plenty of reasons to be optimistic about 2017 thanks to continued economic improvement and the Dow Jones Industrial Average’s climb to a near record level of 20000.

As data on the health of the U.S. economy continues to paint a picture of strength, President-elect Donald Trump also promises more improvement through a series of policy adjustments including an across-the-board tax break for every income class. For some, the good news doesn’t end there. Trump also wants to slash the corporate tax rate to 15%, from the current federal rate of 35%.

With the new Republican-controlled Congress already in session, and Trump set to be sworn in on January 20, the time may be ripe for a change to the tax system.

“The prospects and potential for tax reform haven’t been greater in a long time,” Jeff LeSage, Vice Chairman of Tax at KPMG LLP, told FOXBusiness.com.

Yet, while the stage is set for Republicans to enact reform, Americans may be disappointed to see a watered down version of Trump's proposals emerge from the negotiations on Capitol Hill.

“I think [Trump’s tax proposals] are very aggressive,” David Bahnsen, CIO of Bahnsen Group of HighTower Advisors, told FOXBusiness.com. “They’d be phenomenal tax breaks to get but the reality of it is, with bureaucracy and government, I don’t see everything he wants to propose getting through.”

So what can individuals expect to see in 2017? Here is a breakdown of how Trump’s tax proposals are likely to affect both American businesses and the American family.

Corporations:

The U.S. corporate tax rate is one of the highest among the developed world. While Trump has suggested he would like to significantly reduce that rate, he clashes with Congress over just how low to go.

Trump wants to slash the corporate tax to 15%, yet the proposal put forth by the House GOP suggests using 20% as the primer for negotiations.

According to LeSage, the House recommendation will likely be the starting point for reform discussions.

The President-elect has claimed lowering the federal corporate tax rate will help spur the economy by encouraging companies to repatriate profits they have kept overseas. Although decreasing the tax rate may seem like a net positive for corporations and the economy, LeSage said business owners must take care to read the fine print.

“As part of lowering the rate, in the House plan and certain areas of the Trump plan, there’s elimination of significant deductions and credits that companies currently have,” he pointed out.

These deductions could end up negatively impacting certain industries. For example, retailers and auto manufacturers could suffer significantly due to the elimination of the interest expense deduction which will affect imports, said LeSage.

His best advice for business owners? “You have to model the impact to you [from] the various proposals out there, particularly the House blueprint.”

Individuals:

Trump’s ambitious plan involves collapsing the current seven-tier tax bracket system into just three brackets; those who make less than $75,000 will pay 12%, Americans with earnings between $75,000-$225,000 will pay 25% and workers with incomes of more than $225,000 will pay 33%.

Though Bahnsen believes Trump may not get the full scope of his tax reform proposals approved, he does think Americans of all income classes will have a reason to cheer.

“Everyone across every income bracket should see some sort of tax benefit which definitely goes right to the bottom line for the consumer,” he said.

And if Americans begin to spend more, the economy could finally break free of stagnation.

The most recent consumer spending reading showed a decline in November, though initial data suggests a pickup in holiday spending throughout the month of December.

Tax breaks could have another, unexpected, benefit for one big demographic: the Millennials. According to Bahnsen, as members of that generation begin to hit their mid-30’s they will begin to purchase big-ticket items such as houses and cars. Not only that, he said 2017 is the year more Millennials will start to have children of their own and will start buying for a new generation of consumers.

“This huge demographic shift…is going to translate into big dollars being spent…. That coupled with the fact that they could be in a better tax situation… could be a huge boom for the economy, just as we saw in the 80s,” he said.