The Potentially Problematic Nature Of Trump’s Tax Plan

05/31/2017 10:53 am ET Updated May 31, 2017

Donald Trump made a key promise during his presidential campaign to revise the nation’s tax code while lowering taxes. However, upon closer examination of his recently released tax proposal, certain groups will benefit, while others may suffer economic harm.

Taxes were a key item in Donald Trump’s presidential agenda. He and his advisors feel that revision of the nation’s tax code will spur economic growth and, besides changing healthcare policy, be a hallmark of his presidency. However, his proposed tax policy will benefit businesses and the wealthy, while hurting the middle class, the poor, and ballooning the federal budget deficit and the national debt.

Winners under Trump’s plan

A key change in individual taxes could occur with the revision of tax brackets. Trump’s proposal calls for reducing tax brackets for individuals from seven to three set at 10, 25, and 35 percent. According to The Wall Street Journal, this reduces the amount of taxes on individual income for those earning over $699,000 by $214,000, while their ultimate share of all federal taxes reduces to 25 percent. This will benefit the wealthy since the top tax rate decreases from 39.6 percent to 35 percent.

The standard deduction will double, affecting all taxpayers. As the law now stands, single individuals can deduct $6,350 from their taxable income while married couples deduct $12,700.  Trump proposes that individuals will deduct $12,700 while married couples can write off $25,400. The proposed benefits are that average taxpayers will pay less taxes if they do not have itemized deductions and simplify tax return preparation without the use of an accountant or preparer.

Two key areas of Trump’s tax plan are the repeals of the alternative minimum tax (AMT) and the estate tax. The AMT requires individuals with a high number of deductions to calculate the amount owed in taxes under the normal rate and the alternative and ultimately pay the higher amount. While the AMT was intended to rid huge deductions by wealthy taxpayers, according to the Tax Policy Center, approximately 5 million people are now affected. The elimination of the estate tax would allow inheritances of $5.5 million for individuals and couples with estates over $11 million to transfer tax free.

The capital gains tax would be reduced from 23.8 to 20 percent. This reduction comes from the elimination of the 3.8 percent tax that helps fund Obamacare applying to investment income over $250,000 for a married couple. This cut is to incentivize investors for increasing investments while minimizing the after-tax liability. Treasury Secretary Steven Mnuchin hopes to greatly encourage investments and, in the long and short-term, stimulate economic growth.

Corporations stand to gain substantially since their tax rate would decrease from 35 to 15 percent. This is considered the most aggressive step in the Trump tax plan since the goal is to set the corporate tax rate on par or below that of other industrialized countries and, therefore, become more competitive. The objectives are to bring jobs to American shores, attract foreign capital, and incentivize global companies to establish subsidiaries or relocate to the United States while stimulating long-term economic growth.

What remains intact are deductions for mortgage interest and charitable donations, the two most popular among American taxpayers. Touching these deductions would most likely hurt the housing market and home values, and non-profit organizations relying on donations to survive.

Losers under Trump’s plan

Trump’s economic team feels that cutting taxes will help the American economy in order to reach their goal of 4 percent GDP growth. But the plan has some potential problems that outweigh the intended benefits.

A key problem with the plan is that the federal deduction for state and local income taxes would be eliminated, thereby hurting taxpayers in New York, California, or Massachusetts who pay high amounts. The residents of those and other such states would be severely hurt since their taxes are much higher than places like Florida and Texas, and would actually see a severely substantial tax increase. According to the congressional Joint Committee on Taxation, taxpayers using this deduction save more than $100 billion, which is actually greater than the mortgage interest deduction.

There is also the proposal to eliminate itemized tax deductions other than mortgage interest and charitable giving. Mnuchin stated that the reasoning behind this move was to eliminate tax loopholes while offsetting the reduction in the base tax rate for Americans in higher income brackets. The problem here is that there are certain taxpayers who are not in the higher tax brackets and may need those itemized deductions in order to lower their tax liability. In the end, they may actually see their federal income tax bill increase and not feel the proposed beneficial effect of Trump’s plan.

Trump’s plan also increases the federal budget deficit and the national debt. The plan Trump has proposed, which was set out as a one-page proposal without any financial justification to back it up, never stated anything at all about how the federal budget will be impacted nor how the national debt either increases or decreases. According to the analysts from the Tax Policy Center, federal revenue is estimated to decrease by $6.2 trillion over the next ten years. The Trump economic team should hope that there will be the 4 percent economic growth they projected that will make up for the federal revenue decrease. But if there is a recession or economic downturn, then Trump’s proposal will suffer serious consequences.

Too much uncertainty

Trump’s proposal has many in Congress wondering if this plan is doable, since many of their constituency could actually end up paying more taxes. However, according to the Tax Policy Center, almost half of the benefits of Trump’s plan would gravitate to the top 1 percent or those earning more than $700,000 annually. But the bigger question is, given Trump’s political and possibly legal problems, will such a plan actually occur?

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