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Tax Reform Revealed: Will the U.S. Become the Best Next Tax Haven?

On April 26, 2017, with great fan-fare, the White House announced bold proposals for tax reform, the primary objective of which is to stimulate economic growth. These reforms could be a real game-changer if they succeed in creating new jobs, fuelling economic expansion, and making the U.S. more competitive – and dare I say it …making America great again.

In a nutshell, the Trump Administration principles for tax reform would among other things:

  • reduce tax brackets from 7 to 3
  • set rates at 10%, 25% and 35%
  • repeal the estate tax
  • set the top tax rate at 20% for capital gains and qualified dividends

No doubt, the White House has made tax reform a centre-piece and top priority. Key policy issues and concerns abound as to whether lost tax revenue will create gaping budgetary deficits, and as to who will really benefit from these reforms – will it be the wealthiest and top earners at the expense of middle earners who will shoulder future deficits and federal debt?

Corporate rates at 15% would switch the U.S. from having some of the highest tax rates of any OECD country to having some of the lowest and in the ballpark of Ireland at 12.5%, one of the most competitive countries in the world and which in the last quarter of 2016 grew at an enviable rate of 7.2%.

What remains to be seen is whether the economic growth that results from these steep tax cuts will be enough to finance their costs.

The U.S. estate tax was originally introduced to promote greater economic intergenerational equality, nation-building and social cohesion by limiting the ability to pass on inherited wealth. Its repeal would benefit the very wealthiest. The high present exemption level means the tax only applies to a person who in 2017 has a worldwide wealth of over $5.49M (U.S.) and for a married couple over $10.98M (U.S.). As a result, very few pay estate tax, only about 2 per 1,000.

The Trump campaign proposal was to replace the estate tax with a capital gains regime on death. It is not clear under the new proposals whether the estate tax would be replaced by a different form of tax.

It is starting to think that these proposals could make the U.S. a preeminent tax haven for many.

The repeal of the estate tax would certainly help to minimize tax exposure and complexity in estate planning in owning a U.S. vacation home or other U.S. situs assets, including U.S. securities. Those who have a U.S. spouse, child or other U.S. beneficiary would no longer have to be concerned about exposing the wealth they pass on to a 40% tax at the beneficiary level.

And the proposal of a top tax rate of 35% might be attractive for those who have the ability to become a U.S. tax resident, in comparison to the top effective Canadian tax rate of over 53% in several Canadian provinces.

What the future holds and how tax reform in the U.S. will roll-out and the exact details are unknown and remain to be seen. But what is known is that the U.S. is now embarking on the biggest tax reform in a generation – pure and simple ….or maybe not?

– Margaret O’Sullivan

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.