Monday, December 5th: Trump on Taxes:
Before I talk about Trump’s tax plan and compare it to the House plan, I want to make a statement.
Whenever we talk about tax cuts, most people talk about how tax cuts “enable the top 1%.” I read one article that cited a statistic from Forbes that 47% of Trump’s tax cut could go to the top 1%. The article went on to discuss how awful that is.
Unfortunately, this was a terribly written article, that would not convince anyone who is remotely fiscally conservative. This is because that statistic says nothing, and argues nothing, as it does not correctly identify the problem with Trump’s tax plan, or with tax cuts in general.
A lot of people who talk about “enabling the top 1%” do not understand who is IN the top 1%.
Take a look at this, this, this, or this article and you’ll quickly see that the top 1% is not all billionaires who are selfish hoarders. The top 1% includes doctors, professors, and other noble professions that we as a society laud. There is a huge difference between the lower 1%– those who are doctors, lawyers, professors (people who have gone to school for a VERY long time and spent a LOT of money to have a profession where they can, every day, help people), and the people who acquired their money through capital gains, own 19 houses, have never given a dime to anyone, while they sit back and watch their income quadruple every year.
Thus, what we SHOULD be saying—or asking, or arguing—is how much of certain tax cuts will go to the top 0.1%, or if you want to be very critical, how much is going to the top 0.5%, i.e. the upper 1%.
I will state my opinion: I do NOT support taxing people in the lower 1%. I do not support higher taxes on people who went through the lauded process of working hard, studying hard, going into debt from studying hard, who then found “success” in a noble, difficult, incredibly helpful profession. I DO support taxing the upper 1%, where many acquired their money NOT through such a lauded process and do not use their money to help others in need.
In fact, I believe we need to take a long, hard look at ourselves in the mirror if we are really championing taxing an excessive amount on people who want to be doctors, lawyers, or professors. What does that say about how we feel about such professions? What does that say about people who want to go into debt to pursue a passion that would help so many, only to be taxed more than someone who did not graduate from high school?
I believe our entire way of arguing about tax brackets and plans puts doctors and billionaires on the same level, when they simply are not. This places large disadvantages on doctors while further enabling billionaires, only pushing more people to be fiscally conservative and to despise the government, while billionaires continue to be rewarded for their malpractice. Oh yeah, all while we never actually lift people out of poverty!!! It’s a dead end, folks. And it’s why fiscally conservative and fiscally liberal people continue not to see eye to eye: We are misidentifying the problem.
Now, don’t get me wrong, I do NOT like how Trump’s plan is addressing this “upper 1%” problem. In fact, according to Bloomberg, if Trump were to get everything he has proposed from a Republican-controlled Congress, people in the top 0.01 percent, making $3.7 million or more in a year, would receive $1 million in annual tax savings.
That’s 27% a year in savings! Now THAT is unacceptable! THAT is where the problem lies! And THAT is what Trump’s tax plan should really be addressing, but fails to address. So, yes, if you want to go crazy about how much you hate Trump’s tax plan, use THAT statistic. It’s one that anyone with a heart and brain should find appalling. But don’t go telling people Trump’s tax plan is the worst because it provides tax breaks to the 1%. Because by that statement you may be discouraging lauded professions like doctors and professors, and a lot of fiscally conservative individuals will dismiss your argument.
Now, onto Trump’s tax plan, which he calls the Middle Class Tax Relief Plan.
Trump’s Tax Plan involves:
- Income taxes
- Corporate taxes
- Deemed repatriation tax
- Small business tax
- Carried interest tax
- Capped itemized deductions
- Repeal the alternative minimum tax
- Affordable and Childcare and Eldercare Act
For each section, I’ll bullet point the highlights. Then explain it all in plain English after the bullet points, if necessary. After I explain Trump’s tax plan, I’ll compare it to the House tax plan.
- Income taxes
- Trump’s proposed plan would consolidate the current seven tax brackets into three
- Would adapt the current rates for qualified capital gains and dividends to these new brackets
- Would eliminate the head of household filing status
- Would eliminate the Net Investment Income Tax (NIIT)
- Would increase the standard deduction from $6,300 to $15,000 for singles and from $12,600 to $30,000 for married couples filing jointly
- Would eliminate the personal exemption
The Trump tax plan would consolidate the current seven tax brackets into three, with rates on ordinary income of 12%, 25%, and 33% (the top rate falling from 39.3 to 33).
According to Carmel Martin, executive vice president for policy at the Center for American Progress Action Fund, the new tax brackets would result in a $1 million tax cut for the top 1% of taxpayers.
In addition, the Tax Foundation reports that Trump would adapt the current rates for qualified capital gains and dividends to the new brackets; eliminate the head of household filing status; eliminate the Net Investment Income Tax or NIIT (the NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts); increase the standard deduction from $6,300 to $15,000 for singles and from $12,600 to $30,000 for married couples filing jointly; and eliminate the personal exemption.
The Tax Foundation has an interactive tax calculator that allows taxpayers to see how the Trump plan would affect their bottom line compared to current law.
For all the money made on capital gains and dividends (the money earned in interest and/or performance of stock), those amounts will fall into the new tax brackets and be taxed.
He will no longer allow a single household to file as ONE “head of household” and another (the others) “dependent” but rather TWO individuals or “heads” in a single household.
The simplest point to explain is that Trump will eliminate the ability for individuals to exempt themselves from paying taxes.
Next, when all is said and done, when all taxes are paid by an individual or company, there is a 3.8% threshold of the total profits (leftover gains/money, estate worth, inheritance, etc.) for them to pay. Now, with Trump, individuals and companies will have less TYPES of income to subtract from the total to make the 3.8% less and less, resulting in them paying a bit more in taxes.
Finally, when paying taxes, single individuals were allowed to take legal deductions from their income totaling up to $6,300, and married couples $12,600. Now this will be that the total income – tax deductions = X where tax deductions may not equal more than $15,000/$30,000 and amount paid in tax is X times the tax bracket percentage.
- Corporate taxes
- Decrease corporate tax rate from 35% to 15% to increase US competitiveness
- The hope is that vast sums – $US2.5 trillion says Trump’s website – currently warehoused offshore would come home [to the US]
- Trump would tax long-term capital gains and qualified dividends at a top marginal rate of 20 per cent. The Tax Foundation predicts under the tax changes those on a middle income would see their after-tax adjusted gross income (AGI) rise 19.7% and those in the top 1 per cent would see an increase in after-tax AGI of 27%
- The plan is estimated to increase the federal government’s deficit by more than $US10.14 trillion.
The corporate tax rate would decrease from 35% to 15%, instantly making the U.S. a more desirable location for multinational companies. Gary Hufbauer, a senior fellow with the Peterson Institute for International Economics, says the move would make the U.S. more competitive as it shifts from being the world’s highest-taxing country to among the lowest.
“The hope is that vast sums – $US2.5 trillion says Trump’s website – currently warehoused offshore would come home [to the US],” he said.
According to The Economist, Trump would tax long-term capital gains and qualified dividends at a top marginal rate of 20 per cent. The Tax Foundation predicts under the tax changes those on a middle income would see their after-tax adjusted gross income (AGI) rise 19.7 per cent and those in the top 1 per cent would see an increase in after-tax AGI of 27 per cent. “These changes in the incentives to work and invest would greatly increase the US economy’s size in the long run, leading to higher incomes for taxpayers at all income levels,” it says. It estimates the plan would increase the federal government’s deficit by more than $US10.14 trillion.
- Deemed Repatriation Tax
- 10% “deemed” repatriation tax on the foreign earnings of US-based companies
- He also wants to allow businesses to immediately deduct the cost of asset acquisitions, however, they won’t be able to deduct interest expense on any borrowing.
He has also proposed a 10% “deemed” repatriation tax on the foreign earnings of US-based companies. He also wants to allow businesses to immediately deduct the cost of asset acquisitions, however, they won’t be able to deduct interest expense on any borrowing.
The theory is that this reduces dependence on debt, but economist Wardell-Johnson said it could attract “odd structuring”.
CBPP explains a deemed repatriation tax: “There are two proposals to address multinational corporations’ large stockpile of offshore profits — a transition tax on those profits and a repatriation tax holiday — these may appear similar at first blush but are opposites in many ways. A transition tax is a sound policy that would raise revenues for infrastructure investments or other uses; a repatriation holiday is a tax cut that loses revenue and consequently cannot pay for anything. A third proposal, a “deemed repatriation,” could resemble a transition tax or a repatriation tax holiday, depending on the tax rate. All three types of proposals are sometimes referred to as “repatriation taxes,” but it is important to distinguish among them because of their very different effects on revenue and multinationals’ incentives to shift profits offshore.”
Many off-shore AMERICAN companies re-invest their profits in off-shore accounts to avoid paying the much higher AMERICAN TAXES. Trump has proposed that those profits be taxed at 10% if they do not come to the US to be invested.
Next, Trump want to allow companies to deduct from their final taxable income the costs of buying ASSETS, such as buildings, equipment, real estate, etc. Currently, AMERICAN companies must depreciate these costs OVER TIME.
Trump also wants to stop companies from deducting the interest payments they make on borrowed money. In implementing BOTH these policies, companies will be encouraged to borrow less (since they can deduct the asset costs right away).
Economist Wardell-Johnson says these policies will make companies structure their business practices in a strange way… such as, let’s say, using available cash to buy assets instead of making sure they are saving money for payroll.
- Small Business Tax
- Many small businesses now pay their personal tax rate for so-called pass-through business income. Trump wants to slash that rate to 15%. But more than two-thirds of pass-through income goes to the top 1% of tax filers, according to some estimates, providing another windfall to the wealthy (The Economist).
- Pass-through income is sent from a pass-through entity to its owners. The income is not taxed at the corporate level — it is only taxed at the individual owners’ level. A pass-through entity is a special business structure that is used to reduce the effects of double taxation.
- Let’s say, for example, a person owns a company that is taxed at 45%. The owner only pays taxes on the 25% bracket. He can set up a “pass-through business” to channel the company profits to be paid at HIS tax bracket instead of the higher one. Trump wants to make that a simple 15% to stimulate job growth. Complaints are, though, that this break is only available to those “1%er” individuals with small companies and not to middle class. Indirectly, the article implies that the other side of this coin is that by doing this, Trump is helping middle class small business owner fear less the loss of their company’s income if they grow too big (Investing Answers).
“The US contains a substantial number of businesses located in ‘pass-through entities’ that will be optionally entitled to the 15% tax rate at the owner level, rather than higher personal tax rates. ‘This will encourage workers providing services as employees to ‘incorporate’ into a business structure, given an 18% difference between the top marginal rate and the business rate,’ Wardell-Johnson says. ‘How this would be dealt with is unknown, but there are clearly strong equity issues associated with this measure (The Sydney Morning Herald).’”
- Carried Interest Tax
- Trump has also proposed taxing income from carried interest at ordinary income tax rates
- His website says he will, “eliminate the 3.8 percent tax on net investment income on people who have a modified adjusted gross income of over $200,000 for single filers and $250,000 for married couples filing jointly.”
- Capped Itemized Deductions
- Trump plans to cap itemized deductions
- Implied is the idea that people with large incomes who can deduct a lot of things will have to pay taxes on a bit more of their income since they can only deduct up to:
- $100,000 for single filers
- $200,000 for married couples filing jointly
Trump wants anyone claiming deductions from their personal income (capital gains, salary, etc.) only to be allowed a total of $100K/$200K. Implied is the idea that people with large incomes who can deduct a lot of things will have to pay taxes on a bit more of their income since they can only deduct up to $100K
- Repeal the Alternative Minimum Tax (AMT)
- Trump sees that many people are getting away from paying ANY tax or paying very little tax according to their income bracket merely because they take advantage of ADDITIONAL deductions that automatically place one in a lower (or perhaps the lowest) bracket. These sorts of deductions are medical, childcare, etc.
- He sees the AMT as the force allowing this to happen, so he wants to repeal it.
- The AMT is a supplemental income tax required in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower payments of standard income tax. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (also known as exemption). This exemption is substantially higher than the exemption from regular income tax.
- Repealing the AMT would mean that the people who don’t need those breaks will pay taxes on their appropriate (and usually higher) tax bracket and more of their income will be taxable.
The alternative minimum tax (AMT) is a supplemental income tax imposed by the United States federal government required in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower payments of standard income tax. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (also known as exemption). This exemption is substantially higher than the exemption from regular income tax.
Regular taxable income is adjusted for certain items computed differently for AMT, such as depreciation and medical expenses. No deduction is allowed for state taxes or miscellaneous itemized deductions in computing AMT income. Taxpayers with incomes above the exemption whose regular Federal income tax is below the amount of AMT must pay the higher AMT amount.
A predecessor “minimum tax”, enacted in 1969, imposed an additional tax on certain tax benefits for certain taxpayers. The present AMT was enacted in 1982 and limits tax benefits from a variety of deductions. On January 2, 2013, President Barack Obama signed the American Taxpayer Relief Act of 2012, which indexes to inflation the income thresholds for being subject to the tax.
- Affordable and Childcare and Eldercare Act
- He also wants to add a new credit of $1,200 to the existing child tax credit
- Trump has sought a new “dependent care savings account,” in which parents could contribute up to $2,000 a year tax-free, then spend the money on child care, private school, or after-school enrichment
How does this compare to Paul Ryan’s (Speaker of the House) tax plan?
The House tax plan calls for:
- A lowering of rates and a consolidation of tax brackets
- Repealing the Alternative Minimum Tax
- Closing special interest loopholes
There is one similarity between Trump’s plan and Ryan’s plan:
Income taxes: Both Trump and Ryan wish to make changes to income-taxes — and it’s a point where they are in almost total agreement. Trump and Ryan promise the lowest tax rate since before World War II and to shrink the tax brackets from seven down to three.
There are four differences between Trump’s plan and Ryan’s plan:
Trump’s plan is better regarding deductions. The Trump and Ryan plan would make it difficult for individuals to benefit from specific deductions, as both plans raise the standard deduction limit. The Trump plan would “increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000. The personal exemptions will be eliminated as will the head-of-household filing status. In addition, the Trump Plan will cap itemized deductions at $200,000 for Married-Joint filers or $100,000 for Single filers,” according to Trump’s campaign website. Trump’s plan features proposals “that would offer tax relief to families with children. For example, the latest version of the Trump plan would offer an above-the-line deduction for the average cost of childcare, as well as a credit of up to $1,200 for childcare expenses,” Greenberg told The DCNF. The possible bad news for families is that the Trump plan’s credit for childcare expenses “would not apply to expenses for children over 13.” This could have adverse effects on “low-income families with children over 13,” because these families could “see higher taxes as a result of the plan,” Greenberg said. Ryan’s plan would eliminate all deductions except for mortgage interest and charitable gifts, the Wall Street Journal reported.
2) Corporate tax:
The corporate tax may end up at Mr. Ryan’s proposed 20% rather than Mr. Trump’s desired 15%. Mr. Trump’s costly promise to offer the same rate to sole traders may not survive. Both men agree that there should be three tax rates for individuals (12%, 25% and 33%), but there will be debate over the generosity of deductions.
3) Estate tax:
Trump has vowed to eliminate the estate tax, which he and other Republicans label the “death tax.” He would enact taxes on capital gains at death. Ryan’s plan flatly abolishes the estate tax.
4) Gift Taxes:
Trump has made no formal proposal for gift taxes. Ryan says he will abolish it completely (Daily Caller).