This paper analyzes President-elect Donald Trump’s proposed tax policy. His plan would reduce tax rates for individuals and businesses, increase standard deduction rates and encourage the creation of Dependent Care Savings Accounts (DCSA). The wealthiest households would benefit the most from these tax changes, although taxes will be cut for all households. Trump believes his plan will create 25 million jobs, stimulate the economy and increase the GDP by at least 1.5%. The plan would reduce federal revenue by roughly $5.5 trillion in the next ten years. Unless this plan is supplemented by substantial cuts in government spending it will increase the national debt by $11.2 trillion or 39% of GDP by 2026. This addition to the national debt will negate most, if not all positive effects the tax cuts may have produced. Introduction
In his victory speech on November 9, 2016, President-elect Donald Trump promised once again to move mountains and make miracles happen when it comes to the current economic situation of this country. He has said consistently for some months that his economic plan will create 25 million jobs over the next ten years and improve the GDP by at least 1.5% and optimally by 2%, bringing the GDP to somewhere between 3.5% and 4% on average compared to the current rate of 2%. “My economic program rejects the cynicism that says our labor source will keep declining, that our jobs will keep leaving, and that our economy will never grow as it did once before,” he said on 15 September before the Economic Club of New York (Trump, 2016). In that very same speech Trump promised an “American economic revival.” But the day after he won the Presidential election, questions about the credibility of his program have been brought to the forefront. To most it sounds like a huge contradiction, reduce the debt of the country while simultaneously reducing taxes. How is that possible? This question is one that seems to garner many different answers from many different people. The answer that matters the most is the one President-elect Donald J. Trump gives. Trump stated that his goal is to provide tax relief for the middle class, make the tax code simple and grow the economy, without adding to the debt or deficit (Trump Campaign 2016). In a September 28, 2015 piece written for the Wall Street Journal, Trump matter-of-factly reiterated, “With moderate growth, this plan will be revenue-neutral” (Trump, 2015). Revenue neutrality is based on the implication that changes in the tax laws will result in no change in the amount of revenue the government receives (uslegal.com). A tax proposal can neither increase or decrease tax revenues when compared to existing law to be revenue neutral (uslegal.com).
President-elect Donald Trump has proposed a tax policy that would reduce tax rates for individuals and businesses, increase standard deduction amounts, and limit or revoke certain tax expenditures and tax the revenues of foreign affiliates of U.S. companies. Per the Tax Foundation’s Taxes and Growth Model, the plan would reduce federal revenue by between $4.4 trillion and $5.9 trillion on a static basis (Cole, 2016). Much of lost income would be due to corporate tax cuts ($2.1 trillion) and the rest would be the result of individual tax reduction ($1.4 trillion) (Cole, 2016).
Individual Income Tax
Tax Rates
The Trump plan is centered on the conversion of the current seven tax brackets; which range from 10% to 39.6% effective tax rate, into three brackets of 10%, 20% and 25%. Under this proposal America’s top earners would pay 14.9% or greater than one-third less in taxes. The current long-term capital gains and eligible dividends preferential rates (0%, 15%, 20%) would remain unchanged. The plan includes a revocation of the 3.8% surtax, enacted as a part of the Affordable Care Act, on the investment income earned by high-income taxpayers. Repeal of this surtax would lower the highest tax rate on capital gains and eligible dividends.
Deductions
Under the proposed plan the standard deduction would increase from its 2015 cap of $6,300 for single filers and $12,600 for married couples filing jointly to $15,000 and $30,000 respectively. Personal exemptions and the head-of-household filing status will be eliminated. The higher standard deduction would decrease the amount of taxable income, in turn reducing the amount of taxes paid. The income excluded under the higher standard deductions would normally be taxed at the effective tax rate. Additionally, the Trump plan would limit itemized deductions to $100,000 and $200,000 for single and joint filers, respectively. Under current tax code itemized deductions are only limited if your adjusted gross income exceeds a certain amount based on your filing status (Ruane, 2012). A cap on itemized deductions would simplify the tax code. On the other hand, limiting the amount of itemized deductions would negatively affect a lot of charities. Sadly, most charitable contributions are made for the tax relief it provides. The higher standard deduction would more than likely contribute to a decline in the number of taxpayers that would claim itemized deductions.
Death Tax
The proposed Trump plan will quash the death tax, excluding capital gains valued greater than $10 million, these will still be subject to taxation. Small businesses and family farms would be exempt from the capital gains taxation. What is a death tax? Death tax is another term for estate tax or inheritance tax (dictionary.com). Under current policy only the wealthiest estates pay estate taxes. Those estates valued at more than $5.45 and $10.9 million, for a single person and married couple respectively, are required to pay estate taxes (Joint Committee on Taxation, 2015) Per the Joint Committee on Taxation only the estates of the wealthiest 0.2% of Americans owe any estate tax (Joint Committee on Taxation, 2015). As currently written the death tax collects on taxes that were previously untouchable because of the tax breaks offered to the wealthiest taxpayers. The death tax is a significant source of federal revenue. Under current law between 2017 and 2026 the estate tax will generate about $275 billion, per the Congressional Budget Office (Joint Committee on Taxation, 2015). The money raised from the death tax is used to fund crucial programs- national defense, education and healthcare to name a few. The wealthy benefit from government programs just as much if not more than the poorest of all Americans, the benefits are very different but eerily similar in manner. The poor rely on government programs, such as education and healthcare, funded by the death tax and the wealthy rely on the protections of the government funded by the death tax, through its investment in national defense, education and scientific research. The act of repealing the death tax would place the burden of cost for these programs on other taxpayers, through cuts of benefits and services, or higher public debt. “The man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government”, President Theodore Roosevelt (1906).
Dependent Care
Under Trump’s proposed tax plan parents will be allowed to claim deductions for care expenses for up to four children and elderly dependents. The maximum allowable deduction will be based on the average cost of care for the state of residence and this deduction will be available to all taxpayers earning less than $250,000 (single filers) and $500,000 (joint filers). For lower-income taxpayers spending rebates will be made available through the existing Earned Income Tax Credit. This plan goes as far as to offer the same tax deductions to stay-at-home parents. It has been proposed that Dependent Care Savings Accounts (DCSA) be created as a means for families to set aside extra money to further education opportunities and lessen the burden of elder care for adult dependents. These new accounts would be available to anyone interested in opening one and would allow tax-deductible contributions and will allow balances to accumulate. This proposal is different from the current Flexible Spending Account (FSA) for dependents because current FSA’s are only available if offered by an employer and does not allow the accumulation of a balance. To encourage low earning taxpayers to establish a DCSA the government will match half of the first $1,000 added annually.
Business Tax
Trump’s plan would reduce the current business tax rate of 35% to 15% and eliminate most business tax subsidies. This effective tax rate would be available to all businesses, large or small. This large of a reduction in the business tax rate would diminish the appeal of a US corporation moving its tax residence overseas. There would be an imposition of a one-time transition tax on existing repatriated foreign income belonging to US companies, in an amount up to 10% and be payable over 10 years. As proposed Trump’s plan, would also eliminate the Alternative Minimum Tax (AMT). AMT was designed to prevent wealthy taxpayers from using loopholes to pay their fair share of tax; it basically disallows many deductions commonly used to lower the tax bill of a business (Internal Revenue Service, 2016). The purpose of lowering the effective business tax rate is to encourage US businesses based abroad to bring their revenues back to the country and invest in our economy. The lowering of the effective tax rate makes the US competitive with the tax rates of other countries. At present the US has the highest corporate tax rates in the world.
Consequences
Per Tax Foundation’s Taxes and Growth Model, the proposed tax plan would reduce federal revenue by between $4.4 and $5.9 trillion on a static basis (Cole, 2016). A static analysis is one that does not include or consider the macroeconomic effects of a policy. Increasing the standard deduction and cutting individual tax rates will account for roughly $1.4 trillion in revenue loss and corporate rate reduction will account for $2.1 trillion in losses. On the other hand, the imposed limit on itemized deductions could offset the revenues lost. Including interest costs, Trump’s proposal would add $11.2 trillion to the national debt by 2026. If spending cuts does not offset tax cuts, the national debt would rise by an estimated 39% of GDP by 2026 (Jim Nunns, 2015). These tax cuts will affect the distribution of wealth. The highest income taxpayers would receive the greatest tax cut when compared to the lowest income taxpayer.
Conclusion
The Trump tax plan proposes large tax cuts on individual income and corporate revenues, which would lower the highest individual tax rate and make the business tax rate more competitive with other countries. All taxpayers will see an increase in after tax income, but the biggest increase will have been seen by the wealthiest. Lowering tax rates and dismantling most tax outlays would minimize and make less attractive the incentives of housing US businesses in other countries. The currently proposed plan will simplify tax code and make the general task of taxation easier to implement consistently. The overall assumption is that by simplifying taxation and lowering taxes people will want to invest, jobs will be created and productivity will rise, thus stimulating the economy.
On the other side of the token, based on a static analysis the plan would reduce Treasury revenue by between $4.4 trillion and $5.9 trillion. With the lowering of tax rates there will be less revenue to fund government programs. Most often the low-income earners are those that benefit most from government programs, and under this plan would be the ones that contribute the least, if anything at all. If one can contribute little or nothing and still reap benefits where is the incentive to want more? To do better? The essential concern with Trump’s proposed tax plan is that if the tax cuts are not supplemented by cuts in government spending it will create large budget deficits and a previously unsurpassed national debt.