Trump's Tax Plan and How It Would Affect You

Congress Struggles to Offset $5 Trillion in Lost Revenue

Trump will lower taxes
Donald Trump promised to reform the tax code. Photo by Chip Somodevilla/Getty Images

As of September 12, 2017, the Trump administration has been working with Congress to enact tax reform before year end. They agree on Trump's plan to lower the corporate tax rate from 35 percent to 15 percent. Trump also wants to cut the income tax for middle-income families. He asked for a one-time repatriation of corporate profits earned overseas. He said tax reform will give families and businesses more money to spend.

That will boost economic growth.

They don't agree on which loopholes to eliminate to pay for the cuts. The House agrees to eliminate the deduction on interest that companies pay on debt. The Senate disagrees. The administration has argued to eliminate the deduction families pay on state and local income taxes. Of greater concern is its willingness to end the deduction for home mortgage interest payments. (Source: "Trump's Push for Tax Cuts Is Coming Up Against a Familiar Challenge: A Divided GOP," The Washington Post, September 12, 2017.)

Trump's tax reform plan was outlined in more detail in his first 100 days. On April 26, 2017, Treasury Secretary Steve Mnuchin released a tax reform plan. That plan is similar to the "Five-Part Tax Plan" outlined by Trump during the 2016 presidential campaign. Here's a summary of how the combined plans would affect income taxes, business taxes, and popular deductions for child and elder care.

Income Tax Brackets

Trump's plan would 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 didn't specify the income ranges for those tax brackets. But it would probably be similar to those in the tax plan Trump proposed in 2016 during his campaign.

That created the following tax chart.

Current Income Tax Rate
 
Trump's Tax Plan Income Levels for Those Filing As:
IncomeCap GainsSingleMarried-Joint
10 - 15%12%0%$0-$37,500$0 - $75,000
25 - 28%25%15%$37,500 - $112,500 $75,000 - $225,000
28 - 39.6%33%20%$112,500 +$225,000 +

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

Trump promised in 2016 to eliminate personal exemptions. The exemption allows taxpayers to subtract $4,050 from income for each person claimed on the tax return.  If Trump eliminates it, then families with many children would pay more despite increased standard deductions. For example, a married couple making $56,000 a year would pay $68 a year more without the exemption, despite the increased deduction. (Source: "The $2 Trillion Question in Trump’s New Tax Plan," The Wall Street Journal, May 10, 2017.)

Trump also promised to eliminate the marriage penalty. That occurs if the spouses earn a similar level of income. It sometimes discourages one of the spouses from working. He would also remove the head of household filing status. That would hurt single-parent families who pay less taxes than they would under single status.

Trump would eliminate the estate tax. That would only help the top 1 percent of the population who pay the estate tax.  That's 4,918 tax returns, but they contribute $17 billion in taxes.

Trump would keep the inheritance tax for 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 extract the value by borrowing against the holdings.

(Source: "Trump's Changes to the Tax Codes May Encourage Dynastic Wealth," The New York Times, November 12, 2016.)

Trump would eliminate the Alternative Minimum Tax.  That helps those who make enough to be subject to it. He also promised to end the Obamacare tax on investment income. See Obamacare Taxes.

Corporate Taxes

Trump's plan would lower the maximum small business and corporate tax rate from 35 percent to 15 percent. The United States has one of the highest corporate tax rates in the world. But that doesn't hurt large corporations. Most of them already get a 15 percent rate. That's because they can afford 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. Trump's 2016 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 promised U.S.-based manufacturers they could deduct all expenses for new plants and equipment. That would encourage more investment. Once they do this, they lose the ability to deduct interest expense. (Source: "Donald Trump Pro-Growth Economic Policy Will Create 25 Million Jobs," DonaldJTrump.com.)

Trump's plan eliminates 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 "provides tax relief for families with child and dependent care expenses." It provides no further details. But his 2016 proposal was more specific. It 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 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 receive a rebate. They could use 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

The Tax Policy Center said Trump's Five-Part plan 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. (Source: "An Analysis of Donald Trump's Tax Plan. Figure 1," The Tax Policy Center, December 22, 2015.)

But the plan would dampen economic growth in the long run. That's because it would add $11.6 trillion to the $19 trillion national debt. That would weaken the dollar and raise interest rates. The debt is already more than the nation's annual economic output. To find out why this is important, see Debt-to-GDP-Ratio.  Treasury Secretary Steve Mnuchin wouldn't say whether the plan released in April would increase the debt. (Source: "White House Just Outlined Its Tax Plan. Here's What's in It," CNBC, April 26, 2017.)

If Trump's plan adds to the deficit, it would not pass the Senate. That's because it would require a 60-vote majority to pass. Budget-conscious Republicans and most Democrats wouldn't support such a plan. If Trump's plan didn't add to deficit, it would only require a 50-vote majority. (Source: "Trump Wants Tax Plan to Cut Corporate Rate to 15 Percent," The Wall Street Journal, April 24, 2017.)

Unless the plan changes, it won't pass. Right now it almost doubles the debt. The administration must reduce that impact for the plan to pass. The U.S. Department of the Treasury is meeting with stakeholders and Congress to further develop the plan. 

Many in Congress fought hard to pass sequestration. Some even threatened to default on the debt rather than keep adding to it. If the plan didn't add to the debt, it could have passed with just 51 votes in the Senate. Since it does add to the debt, it requires a 60-vote majority to pass. (Source: "What Donald Trump's Proposed Tax Cut Means for You," Zero Hedge, November 11, 2016.)

How would it affect you if it did pass? 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 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 hurt the poor in another one way. The plan capped charitable deductions at $200,000. The very wealthy often given millions to charities to lower their tax bill. Capping that reduces their incentive to donate. That supports the nonprofits that support the homeless, the hungry and those with chronic diseases.

Third, it hurts parents of school-age children. They lose the personal exemption for each child but 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.)

Fourth, 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 revenue 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.)

Fifth, 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.)

Will Trump's Tax Cuts Work?

The administration is relying on supply-side economics. 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. But today's tax rates are half that. For more, see Would Reaganomics Work Today?

Trickle-down 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. That's one way tax cuts create jobs.

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