Update: On April 26th, President Trump unveiled the latest version of his tax reform plan. While it was a little short on concrete details, a few items stand out. Trump is keeping with his campaign promise to cut corporate tax from 35% to 15%, and small business owners would, in turn, be taxed at the same corporate rate. Additionally, while the new individual tax brackets will indeed be cut down to three from seven, the rates have been slightly changed, settling on 35%, 25%, and 10%. However, no details of the income amounts of these new bracket rates have been announced.
Trump is also attempting to bring in money from overseas by reinstating a one-time repatriation tax, although no rates have been announced right now. On top of also eliminating the estate tax like he planned, Trump has also eliminated itemized deductions aside from charitable giving and mortgage payments, claiming that this will keep richer Americans from filing large deductions. However, this move could also greatly affect freelancers and small business owners. The new plan also eliminated the current 3.8% tax rate on net investment income, which is a move that will also benefit higher-earning Americans.
All new presidents bring with them a tidal wave of big ideas that — along with the pressures of the ticking First 100 Day countdown clock — cause an impatient push to shake things up. Foremost among these priorities is almost always some kind of juicy tax plan that must move from the vagueness of the campaign trail to the cold and clear realities of governing. A lengthy and frustrating process that we’re going to attempt to walk you through by going over the known specifics of President-elect Donald Trump’s and how it will impact you and your wallet.
The Heart Of The Matter
According to the tax policy page on Donald Trump’s website, he wants to “reduce taxes across-the-board, especially for working and middle-income Americans who will receive a massive tax reduction” and to “ensure the rich will pay their fair share, but no one will pay so much that it destroys jobs or undermines our ability to compete.” As with many of Trump’s proposals, the packaging speaks to a great ambition, but does everything add up when you look at the details?
From the Tax Policy Center’s detailed analysis:
“The plan would cut taxes at every income level, but high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income. Overall, the plan would cut the average tax bill in 2017 by $2,940, increasing after-tax income by 4.1 percent. However, the highest-income taxpayers (0.1 percent of the population, or those with incomes over $3.7 million in 2016 dollars) would experience an average tax cut of nearly $1.1 million, over 14 percent of after-tax income. Households in the middle fifth of the income distribution would receive an average tax cut of $1,010, or 1.8 percent of after-tax income, while the poorest fifth of households would see their taxes go down an average of $110, or 0.8 percent of their after-tax income.”
To make these cuts, the Trump tax plan aims to simplify things by cutting the amount of personal income tax brackets from seven down to just three.
Trump’s plan also aims to raise the point at which workers would have to pay income taxes and he wants to cap deductions at $200,000 and eliminate the Estate Tax (which typically only impacts the estates of those in the top 10% of earners).
For businesses, the base rate will drop from 35% to 15% and there will be a break for companies that move foreign profits back to US shores. There is still a question (and a bit of confusion) about pass-through businesses (LLCs and S-Corps that pass their corporate income to their owners who then file at the appropriate personal tax rate) and who will be able to file at that rate and claim their income as corporate earnings. It’s a big question as the result could, according to the Tax Foundation, change the estimated cost of the plan by as much as $1.5 trillion dollars. More on the cost later.
What all of this means is that Trump’s plan is going to lower income taxes for a large number of Americans and for American corporations. Maybe that’s one less credit card bill, maybe that’s a small vacation, a big purchase, or money in the bank for a rainy day. Maybe it helps you to buy equipment, hire employees, or otherwise expand your business. These are all good things, but there are some that aren’t going to feel much in the way of a benefit when all is said and done due to some of the other machinations contained within the plan.
“If you look at the most wealthy, the top 1 percent would get about half of the benefits of his tax cuts, and a millionaire, for example, would get an average tax cut of $317,000… A single parent who’s earning $75,000 and has two school-age children, they would face a tax increase of over $2,400.”
Now, the math seems confusing because we just said that rates are going to be simplified and reduced and that fewer people are going to have to pay income taxes as a result. But the increase for single parents is due, in part, to the elimination of the current exemption ($4,050 per individual and dependent) and the current standard deduction ($6,300 for single filers and $12,600 for married filers) in favor of a standard deduction of $30,000 for married filers and $15,000 for single filers.
In an effort to negate the negative effects on single parents there are childcare tax credits within the plan but will that be enough to offset?
Let’s look at another specific group: millennials. If you’re the average millennial your earnings likely range from $30,000 to $35,000 depending on if you’re a woman or a man. Most single millennials opt for a $6,300 standard deduction and a personal exemption of $4,050. With Trump’s new plan, the personal exemption would be abandoned in favor of a standard deduction of up to $15,000, which would save millennials (and others in that income range) several hundred dollars on their taxes. But what happens if you rely on ObamaCare (the ACA) to help cover your health insurance? The GOP alternative and how it handles the cutoff age for adult children on their parents’ health plans, subsidies, pre-existing conditions, contraception costs, and the like could easily eat up any tax savings brought by the Trump plan.
Additionally, there are concerns about this plan that are tied to its overall cost in dollars and debt burden.
According to the Tax Foundation, the Trump tax plan would cost between $4.4 trillion and $5.9 trillion in lost revenue, depending on what the plan winds up doing with pass-through businesses. But the effect of a tax cut also needs to be considered when reviewing its total cost.
A “dynamic analysis” of the Trump tax plans posits that the plan could boost the GDP by 8.2% and wages by 5.4%. These improvements would put the real cost at between $2.6 trillion and $3.9 trillion over the course of the next ten years.
While this, in and of itself, sounds great, there are also concerns that the plan could increase the deficit by trillions and that that added debt could trigger louder calls to cut government spending, specifically services like Medicare, Medicaid, and Social Security, which could adversely impact low-income earners that are already getting comparatively little from these budget-busting tax cuts. Though, to be fair, Trump has vowed to leave those alone.
But Will It Work?
The philosophy that favors tax cuts for the highest earners and businesses (in an effort to spur job creation and an overall stronger economy) has become known as “trickle down” economics — let the rich keep more of their money and some of it will “trickle down” to the masses via their investments and purchases, is essentially the philosophy here — and its Godfather is former President Ronald Reagan, who slashed taxes for the top earners and pulled America out of a recession in the process. However, in the course of cutting taxes, Reagan tripled the Federal debt.
Following the end of Reagan’s two terms in office, America was hit with a recession under Reagan’s successor, President George H.W. Bush. President George W. Bush’s tax cut plan also followed this general path — stimulating the economy and adding to the debt prior to a recession.
These examples aren’t here to definitively say that trickle down tax cuts will always lead to negative growth and a greater disparity in high-end and low-end wages (because from 1979 to 2005, take home pay crawled up 6% for the bottom fifth of Americans and jumped up 80% for the top fifth). Other factors dealing with trade and manufacturing play a part and really, “definitive” is a hard thing to come by on this issue. Even economists seem split on whether tax cuts have a substantial stimulative effect on the economy.
What this does aim to demonstrate is that there is reason to be suspicious of the big promises of sustained growth that accompany these kinds of policies. Simply put, there is no guarantee that, with extra money in hand, business owners will choose to expand and bring in new workers (thus growing the economy by creating jobs, raising wages, and broadening the tax base).
Where The Plan Stands Now
As we look ahead to the future of Trump’s tax plan, we have to remember that this is all subject to refinement or even outright change. When Trump initially outlined a tax plan a over a year ago, it favored higher earners even more heavily and cost around $10 trillion. Since then, it has come down in cost, but is still quite different from the plan that house Republicans advocated back in June. A not-insurmountable gulf that will surely lead to an interesting back and forth between President Trump, Speaker of the House Paul Ryan, and everyone in the middle as this latest stab at tax reform is defined and re-defined in the next few months.