How Trump's Tax Plan Would Affect You

Getty Images

On April 26, 2017, the Trump Administration released its tax plan. It's very similar to the "Five-Part Tax Plan" outlined by Trump during the 2016 presidential campaign

The Tax Policy Center analyzed the 2016 plan. They said it would boost the economy over the next two to three years. That's because the tax cuts will put more money into people's pockets. 

But in the long run, the Center predicted the plan will dampen economic growth.

That's because it would add $11.6 trillion to the $19 trillion national debt. That will eventually weaken the dollar and raise interest rates. The debt is already more than the nation's annual economic output. (Source: "An Analysis of Donald Trump's Tax Plan. Figure 1," The Tax Policy Center, December 22, 2015.)

On April 24, 2017, Trump said he didn't care if the tax plan increased the debt. On Wednesday, April 26, Treasury Secretary Steve Mnuchin wouldn't say whether the new plan would increase the debt. (Source: "White House Just Outlined Its Tax Plan. Here's What's in It," CNBC, April 26, 2017.)

This lowers the chance his plan would pass the Senate. Because it adds to the deficit, it would require a 60-vote majority to pass. Democrats wouldn't support such a plan, and many budget-conscious Republicans wouldn't either. If Trump proposed a plan that didn't add to deficits, it would only require a 51-vote majority.

(Source: "Trump Wants Tax Plan to Cut Corporate Rate to 15 Percent," The Wall Street Journal, April 24, 2017.)

Income Taxes

Trump plans to reduce the current seven tax brackets to three. The top bracket would be taxed 35 percent, the middle rate would be 25 percent and the lowest rate would be 10 percent.

The plan released on Wednesday didn't specify the income ranges for those tax brackets. But it would probably be similar to those in the tax plan Trump proposed during his campaign. That created the following tax schedule:

Current Income Tax Rate
 
Trump's Tax Plan Income Levels for Those Filing As:
IncomeCap GainsSingleMarried-Joint
10 percent-15 percent12 percent0 percent$0-$37,500$0 - $75,000
25 percent-28 percent25 percent15 percent$37,500 - $112,500 $75,000 - $225,000
28 percent-39.6 percent33 percent 20 percent$112,500 +$225,000 +

 

The 2017 plan promised to eliminate all itemized deductions except for those on mortgage interest, retirement savings and charitable contributions. It would double the standard deduction for everyone. Married-Joint Filers' deduction rose from $12,700 to $24,000. Single filers' deduction rose from $6,300 to $12,600. (Source: "Trump's Tax Plan Doubles Standard Deduction," Fox Business News, April 26, 2016.)

Trump's plan would eliminate the estate tax. This tax only applies to the top 1 percent of the population. That's 4,918 tax returns, but they contribute $17 billion in taxes. The only inheritance tax that would remain is on capital gains. But even that would be excluded if the heirs never sold the property.

For example, children who inherit their father's real estate holdings wouldn't be taxed as long as they never sold them. They could still borrow against it. (Source: "Trump's Changes to the Tax Codes May Encourage Dynastic Wealth," The New York Times, November 12, 2016.)

The plan also eliminated the Alternative Minimum Tax and the Obamacare tax on investment income. See Obamacare Taxes and Penalties.

The following changes were not in the 2017 plan, but were in Trump's 2016 campaign plan. He promised to eliminate:

  • Marriage penalty.
  • Head of Household filing status. That affects single-parent families who would pay more taxes under Single status.
  • Personal exemptions. That affects families of school-age children who lose a $4,000 exemption for each child. 

Corporate Taxes

Trump's plan would lower the maximum small business and corporate tax rate from 38 percent to 15 percent.

The United States has one of the highest corporate tax rates in the world. But, many corporations already get a 15 percent rate. That's because most major corporations have tax attorneys who help them avoid paying higher taxes. Almost half of corporations pay no taxes since they pass them onto their shareholders. (Source: "Donald Trump Tax Reform," OnTheIssues.org.)

The plan extends that tax rate to partnerships, real estate companies, hedge funds and private equity funds. They would be taxed at the capital gains tax rate (15 percent) instead of the income tax rate (39.6 percent).  (Sources: "Trump's Tax Cut Plan," The New York Times, April 26, 2017. "Hedge Fund Managers Are Getting Away With Murder," Fortune, August 24, 2015.)

The plan would allow a one-time repatriation on income earned overseas. Mnuchin didn't say what the rate would be. Trump's prior plan set it at 10 percent. That would get corporations to bring money back into the United States. It might also keep companies in this country. The plan advocates a "territorial" tax system. It would exclude the income that businesses earn overseas. (Source: "White House Just Outlined Its Tax Plan. Here's What's in It," CNBC, April 26, 2017.)

Trump's prior plan also promised all U.S.-based manufacturers that they could deduct all expenses for new plants and equipment. That would encourage more investment. Once they do this, the lose the ability to deduct interest expense. (Source: "Donald Trump Pro-Growth Economic Policy Will Create 25 Million Jobs," DonaldJTrump.com.)

It also eliminated loopholes available to the very wealthy and corporations. These included the ability to avoid taxes by setting up offshore businesses, such as those in the Cayman Islands. It steepened the curve of the Personal Exemption Phaseout and the Pease Limitation on itemized deductions. It phased in a cap on business interest expenses. (Sources: “Congressional Hearing on Steve Mnuchin,” January 19, 2017. “CNBC Interview,” March 10, 2016. "Tax Reform," DonaldJTrump.com.)

Child and Elder Care Deductions

Trump's 2017 plan eliminated all itemized deductions. That's different than his 2016 proposal. It would have allowed parents to deduct the average cost of child care and eldercare expenses. The deduction was not available for those earning over $250,000 Single/$500,000 Married-Joint. To qualify for the deduction, children must be under age 13. The tax cut would be limited to four children. The deduction can include expenses of paid and unpaid caregivers. 

The 2016 plan would have allowed up to $2,000 to be deposited tax-free into a Dependent Care Savings Account. That allows earnings to grow tax-free to pay for the child's education at age 18. Taxpayers who are eligible for the Earned Income Tax Credit would have received a rebate. They could have used that rebate for the DCSA. For more detail on this, see Donald Trump Tax Plan.

The 2016 plan included a $5,000 deduction for elder care. Elders had to be listed as a dependent to qualify. (Sources: "An America First Economic Plan," Donald J. Trump. "Donald Trump Just Made Major Changes to His Tax Plan," CNBC, August 8, 2016.)

How It Affects You

Trump's plan is not guaranteed to pass. It is twice as costly as the Republican House of Representatives' plan that it followed. Many in Congress fought hard to pass sequestration. Some even threatened to default on the debt to keep from adding to it. Comprehensive tax reform requires that all Republicans, especially in the Senate, agree on the plan. (Source: "What Donald Trump's Proposed Tax Cut Means for You," Zero Hedge, November 11, 2016.)

Assuming it does pass, here's how Trump's tax plan affects you. First, it would benefit the wealthy more than the middle class. Once all the deductions and exemptions are factored in, the poorest fifth of the population would receive a tax break of 0.6 percent. That improves for each income level. Those in the top fifth would get a 3.2 percent tax break. The top 1 percent would get a 6.5 percent break, while the top 0.1 percent would get a 7.3 percent rate cut, from 39.5 percent to 32.2 percent. For example, someone earning $5 million would pay $800,000 less in taxes. (Source: "Who Benefits from Donald's Trump's Tax Plan?" NPR, November 13, 2016.)

Second, it would increase the debt. That's because the wealthiest Americans contribute the lion's share to total tax revenues. Trump says he would offset the tax cuts by eliminating loopholes, but he isn't specific. The Tax Policy Center says his plan would add at least $440,000 a year to the debt. (Sources: "Donald Trump's Tax Plan Now Favors the Ultrarich Even More," The Washington Post, September 19, 2016. "Indecent Disclosure," The Economist, January 2, 2015.)

Third, it would hurt the poor in more than one way, since it caps deductions at $200,000. The very wealthy often given millions to charities to lower their tax bill. Capping that reduces their incentive to donate. The organizations that support the homeless, the hungry, those with chronic diseases, the environment, animals and more would have less funds to work with.

Fourth, it especially hurts parents of school-age children. They lose the personal exemption for each child and don't qualify for the child care expense deduction. That means almost 10 million parents will see their taxes increase. (Source: "Trump's Tax Plan Could Hike Taxes for Middle- and Low-income Families," CNNMoney, September 26, 2016.)

At the same time, it will increase growth in the first five years. It will add 1.7 percent to growth in 2017, 1.1 percent in 2018 and 0.5 percent in 2019. That growth will add to income tax revenue. The Tax Policy Center estimates it will add $53.1 billion in 2017. After that, it will add $34.9 billion in 2018 and $17.5 billion in 2019. But, these receipts are not enough to offset the revenue losses incurred by the cuts. (Source: " An Analysis of Donald Trump's Tax Plan," Tax Policy Center, October 18, 2016.)

Trump is betting on trickle-down economics to add revenue. That theory advocates giving tax cuts to businesses so they can create jobs. It worked during the Reagan Administration because the highest tax rate was 70 percent. According to the Laffer Curve, that's in the prohibitive range. That's when taxes are high enough that cuts can boost the economy out of debt. For more, see Would Reaganomics Work Today?

Supply-side economics no longer works. That's because modern tax rates are below the prohibitive zone. Furthermore, most corporations have so much cash that they’re buying back stock shares instead of creating jobs. They won't add jobs to build products until they see demand for them. That's why it makes economic sense to give the biggest tax cuts to the poor and middle class. They are more likely to spend every dollar they get. Once demand is there, then businesses create jobs to meet it. 

Other Donald Trump Policies