Trump Wants to Cut Taxes by $6+ Trillion: Who Gets What?
March 30, 2017
President Donald Trump has proposed the largest tax cut since Ronald Reagan’s 1981 plan, totaling some $6 .2 trillion (yes, that’s right – “trillion” with a “t”) over ten years, with most of it going to the wealthy and to businesses. If that means you, you have reason to smile – at least for now.
At the moment, Trump’s plan is only a proposal, and it has already been revised twice since he unveiled it as a candidate for the presidency in 2015. That revision lopped off about $3 trillion in cuts, and the current proposal has yet to be written up in a bill to present to Congress. Still, it’s twice as large as House Republicans are calling for.
Given that Trump wants to increase spending on both the military and infrastructure while holding Medicare and Social Security benefits steady, economists say that without huge cuts in other kinds of spending his tax plan would dramatically increase both the federal budget deficit and government debt, effects that are anathema to every Republican in Congress.
In this light, it’s premature to expect every feature of the Trump tax plan to be signed into law. But, after the repeal and replacement of the Affordable Care Act, a huge tax cut combined with tax simplification, is the primary domestic legislative objective of both the Trump administration and congressional Republicans. It’s reasonable to expect that when passed, the new tax code will resemble many of the features, if not their precise values, that Trump has put forward.
So, without further ado, here’s a summary of the Trump tax plan and how it would affect taxpayers. First, we’ll look at changes in personal taxes, and then the changes proposed for business taxes.
Personal Taxes
There are eight key changes to personal taxes in the Trump proposal:
• Lowering tax rates and collapsing the current seven brackets into three, as shown here:
2016 Brackets
| Marginal Tax Rate | Single Filer Income | Joint Filer Income |
|---|---|---|
| 10% | $0 – $9,275 | $0 – $18,550 |
| 15% | $9,276 – $37,650 | $18,551 – $75,300 |
| 25% | $37,651 – $91,150 | $75,301 – $151,900 |
| 28% | $91,151 – $190,150 | $151,901 – $231,450 |
| 33% | $181,151 – $413,350 | $231,451 – $413,350 |
| 35% | $413,351 – $425,050 | $413,351 – $466,900 |
| 39.6% | $425,051+ | $466,901+ |
Trump Brackets (latest)
| Marginal Tax Rate | Single Filer Income | Joint Filer Income |
|---|---|---|
| 12% | $0 – $37,499 | $0 – $74,999 |
| 25% | $37,500 – $112,499 | $75,000 – $224,999 |
| 33% | $112,500+ | $225,000+ |
• Raising the standard deduction from $6,000 per person to $15,000 for single filers and $30,000 for joint filers, while repealing personal exemptions.
• Allowing deductions for care for children under the age of 13, and the creation of tax-advantaged Dependent Care Savings Accounts.
• Eliminating the Head of Household filing status (for unmarried filers with children under the age of 19 and/or disabled dependents).
• Capping itemized deductions to $100,000 for single filers and $200,000 for joint filers.
• Elimination of the Affordable Care Act’s 3.8% investment income tax (assessed in 2016 against those in the two highest income tax brackets).
• Eliminating estate and gift taxes, while assessing capital gains taxes on the owner’s death, subject to a $5 million exemption for individuals and $10 million for married couples.
• Eliminating the Alternative Minimum Tax.
What’s the potential impact of these changes? According to an analysis by the Tax Policy Institute, “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.” The Institute went on to note that the plan would:
• Cut the average household 2017 tax bill by $2,940 and increase after-tax income by 4.1%, but
• Reduce the bill for the highest-income taxpayers (those with incomes of more than $3.7 million) by almost $1.1. million, or more than 14% of after-tax income.
• For households in the middle fifth of income, cut taxes by an average of $1.010, or 1.8% of after-tax income.
• Provide an average reduction of $110 or 0.8% of after-tax income for the poorest fifth of all households.
• Marginally increase the tax bill for people who previously filed as a head of household and for large families.
The tables below shows the proposed migration of household income from the 2016 tax brackets to the brackets in Trump’s latest proposal:
Single Filers Adjusted Gross Income
| Over | Up To | Current Marginal Rate | Trump Marginal Rate |
|---|---|---|---|
| $0 | $10,350 | 0% | 0% |
| $10,350 | $15,000 | 10% | 0% |
| $15,000 | $19,625 | 10% | 12% |
| $19,625 | $48,000 | 15% | 12% |
| $48,000 | $52,500 | 25% | 12% |
| $52,500 | $101,500 | 25% | 25% |
| $101,500 | $127,500 | 28% | 25% |
| $127,500 | $200,500 | 28% | 33% |
| $200,500 | $423,700 | 33% | 33% |
| $423,700 | $425,400 | 35% | 33% |
| $425,400 | Unlimited | 39.6% | 33% |
Joint Filers – No Dependents Adjusted Gross Income
| Over | Up To | Current Marginal Rate | Trump Marginal Rate |
|---|---|---|---|
| $0 | $20,700 | 0% | 0% |
| $20,700 | $30,000 | 10% | 0% |
| $30,000 | $39,250 | 15% | 12% |
| $39,250 | $96,000 | 25% | 12% |
| $96,000 | $105,000 | 25% | 25% |
| $105,000 | $172,600 | 28% | 25% |
| $172,600 | $252,150 | 33% | 25% |
| $252,150 | $255,000 | 33% | 25% |
| $255,000 | $433,750 | 33% | 33% |
| $433,750 | $487,650 | 35% | 33% |
| $487,650 | Unlimited | 39.6% | 33% |
Source: Tax Policy Institute, Oct. 11, 2016
The following table shows how tax bills would change under the current Trump proposal by household income percentile:
| Quintile/Percentage | Change in After-Tax Income | Share of Federal Tax Change | Average Federal Tax Rate Change | Average Federal Tax Rate Percent Change | Average Federal Tax Rate Under Proposal |
|---|---|---|---|---|---|
| Lowest Percentile | +.08% | 1.1% | -$110 | -0.8% | 2.9% |
| Second Quintile | +1.2% | 3.0% | -$400 | -1.1% | 7.3% |
| Middle Quintile | +1.8% | 6.6% | $-1,010 | -1.5% | 12.1% |
| Fourth Quintile | +2.2% | 11.3% | -$2,030 | -1.8% | 15.5% |
| Top Quintile | +6.6% | 77.7% | -$16,660 | -4.9% | 21.2% |
| ALL | +4.1% | 100% | -$2,940 | -3.3% | 16.8% |
| UPPER PERCENTILES | |||||
| 80-90% | +2.3% | 7.9% | -$3,270 | -1.9% | 18.3% |
| 90-90% | +2.8% | 6.2% | -$5,350 | -2.1% | 20.0% |
| 95-99% | +6.0% | 16.3% | -$18,490 | -4.5% | 21.0% |
| Top 1 Percent | +13.5% | 47.3% | -$214,690 | -9.0% | 24.4% |
| Top 0.1 Percent | +14.2% | 24.2% | -$1,066,460 | -9.3% | 25.1% |
Source: Tax Policy Institute, Oct. 11, 2016
Business Taxes
The leading feature of the Trump tax plan for business is a reduction in the nominal top income tax rate by more than half. But the Trump administration has said that its proposed changes in business taxation would be “revenue neutral ,” in part because of the elimination of various “special interest” tax breaks and increased revenues from the repatriation of foreign profits. While that may be true, depending on the industry and size of company, some businesses would pay more in taxes while others would pay more.
Here is a summary of Trump’s proposed changes for business:
• Reducing the top corporate income tax rate from 35% – nominally, among the world’s highest when state and local taxes are taken into account – to 15%.
• Owners of “pass-through” enterprises — sole proprietorships, partnerships and S corporations – would be subject to a 15% tax on pass-through income instead of their corresponding personal income tax rate.
• The ability to deduct the full amount of capital investments (equipment, plant and inventories) in the year they are made instead of depreciating them over a number of years. If taken, however, businesses will not then be able to deduct interest expenses.
• For multinational businesses, a one-time 10% tax on repatriated cash holdings, payable over 10 years – a measure Trump expects to result in $2 trillion flowing back to the United States; and no income tax on future foreign profits.
• A border adjustment tax on imported goods and an exemption on exports. The President and his advisers anticipate that the tax would raise $1 trillion over 10 years. Critics of the measure argue that businesses would pass on the tax on imports to U.S. consumers by raising prices, while supporters argue that those higher prices would be offset by a stronger U.S. dollar.
It’s unclear when the Trump administration will submit a bill to the House of Representatives, where tax legislation originates, when it is likely to become law and how much the law will resemble the President’s current proposal. The current House proposal undercuts Trump’s tax cuts by about half, so there is a wide gap to be resolved. It’s probable, however, that as long as Republicans control both the White House and Congress, federal taxes will be lowered and the tax code simplified.