Republicans in Congress will likely enact President-elect Donald Trump’s tax plan within the first 100 days after his inauguration. Trump’s proposal will cut taxes primarily for businesses and the wealthy, but would include across-the-board cuts as well.
Trump’s proposal, which was ever-changing over the course of his presidential campaign, would cut taxes by $6.2 trillion over the next decade, according to a Tax Policy Center (TPC) analysis of the most recent version of his plan. If interest costs are included, then the federal debt would rise by $7.2 trillion over the first ten years and by $20.9 trillion by 2036.
“His tax plan is very traditional Republican fare in that it is geared toward business tax reduction under the premise that higher business taxes are a burden that holds back capital formation and job creation,” said Edward Harrison, producer of RT America’s award-winning financial show, ‘Boom Bust’. “Liberals would dispute this claim and see his plan as favoring business owners at the expense of wage earners, thus increasing income inequality."
Taxes would be cut for all income levels, but would mostly benefit the highest-income households, despite Trump saying during an NBC town hall meeting that he believes in raising taxes on the wealthy. The plan would also reduce tax rates, simplify many provisions and reform taxes on business.
"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," Lily Batchelder, a law professor at New York University and visiting fellow at the TPC, told NPR.
A family earning between $40,000 and $50,000 ‒ part of what Trump referred to as “the middle class, the forgotten people, the forgotten men and women of this country, who built our country” and for whom he promised to “massively cut taxes” ‒ would only see a tax cut of $560. Many in the middle class will even see their taxes go up, Batchelder wrote in a report. By collapsing the current tax schedule from seven rates, which range from 10 to 39.6 percent, to three rates of 10, 20 and 25 percent, Trump would raise rates at some income levels. Overall, though, those people who earn the most gain the most under the president-elect’s proposed system.
Trump’s tax plan would hit single parents the hardest because he would eliminate the head-of-household filing status. “By itself, that boosts tax rates for single parents at most income ranges,” the TPC’s Robertson C. Williams wrote in an analysis. Trump would also eliminate personal and dependent exemptions, hurting single parents who don’t itemize.
Trump seeks to offer a tax deduction pegged to the average cost of childcare in each state for up to four children. The deduction would be available to individuals earning up to $250,000 and married couples earning up to $500,000, regardless of whether childcare is used. The result is that the tax plan has “managed to massively increase the tax free income that families can earn before facing income tax,”according to Forbes contributor Ryan Ellis. The tax cut would be of “limited help to the very poor” because they don’t pay income tax as it is, “is a good amount of help for median/middle class families, and is a pretty large windfall for all but the wealthiest parents in America.”
The plan relies on supply-side economics, according to a Forbes analysis, which requires the cuts to be “enormous to have any macroeconomic effect on a $16-18 trillion economy.” But making cuts that large ‒ which Trump initially proposed ‒ would be opposed by deficit hawks, who mostly come from the Republican Party. Enhanced growth would not be evenly distributed because, while tax cuts are progressive, spending is not, Forbes contributor Lee Sheppard wrote.
Gross domestic product (GDP) would increase in the short term, but would be “smaller than it would be otherwise because growing budget deficits would push up interest rates and crowd out investment” by 2024, according to the Penn Wharton Budget Model cited by the TPC.
When it comes to businesses, Trump has proposed a corporate income tax rate to 15 percent, cutting the current rate by more than half. Right now, the US has one of the top three highest marginal income tax rates in the world at 35 percent. He would also make the corporate rate available to US businesses that aren’t in corporate form, which is more than half of them. The president-elect also hopes to allow large international businesses (think Apple, Google and Big Pharma) to pay untaxed deferred foreign income to shareholders as dividends at a lower tax rate, as well as a 10 percent repatriation rate for cash and a 4 percent rate for earnings not represented by cash. That income would be double taxed, as companies would still pay taxes on that money in foreign countries.
The tax cut won’t affect certain types of small businesses, such as partnerships, limited liability corporations (LLCs) and sole proprietorships, according to the Motley Fool’s Sean Williams. Those companies would still pay the top individual corporate tax rate of 33 percent.
“In other words, Trump's tax plan isn't very friendly to certain types of small businesses, while at the same time it's bending over backwards to help domestic large corporations,” the Motley Fool’s Williams wrote. “In short, Trump may be overstating the positive impact his tax plan will have on businesses.”
Trump also proposes eliminating the Alternative Minimum Tax, the estate tax and the gift tax, along with spending $1 trillion on infrastructure over the same 10 years that his tax plan would be implemented, he noted.
Eliminating the estate tax benefits the super-rich; Trump would replace it with a capital gains tax on the original share price (called the cost basis) of the assets upon the taxpayer’s death, CNBC reported. There would be an exemption on the first $10 million for small businesses and family farms. Currently taxpayers may leave up to $5.45 million to their heirs ($10.9 million to married couples) without a tax on that inheritance. Anything above those amounts is taxed at 40 percent. About half of the 10,800 estate returns filed in 2015 were taxed, the TPC estimated. The federal government brought in more than $18 billion on those estates.
"It ends the death tax," Trump said in September. "It's a double taxation, a lot of families go through hell over the death tax."