While the details are just emerging and the final plan is sure to change, the tax overhaul that Trump & the Republican party recently unveiled has clear beneficiaries; and early indications are it is NOT the “middle class”. In fact, according to this analysis, Trump’s tax plan will see the majority of the benefits—i.e. tax cuts— to the rich; particularly the top 1% & 0.1%.
In Indianapolis last Wednesday, Trump outlined his proposal and stated, “…the biggest winners will be the everyday American workers as jobs start pouring into our country, as companies start competing for American labor and as wages start going up at levels that you haven’t seen in many years…”. This is your classic “trickle down economics” argument that has been made for decades; that by cutting taxes on big businesses and the wealthy, the average American worker will see the benefits work their way down to them in the form of higher wages and more jobs. The only problem is that study after study has shown these benefits never really reach the middle class. Staying true to theory of trickle down, Trump proposes slashing taxes dramatically for Americans who earn north of $730,000 a year.
What’s in Trump’s Tax Plan?
Although far from finalized, the main points of the plan that affect Individual taxpayers are:
- Reduce the tax bracket from seven brackets to three: with tax rates of 12%, 25% and 35% percent with a possibility of adding a fourth bracket.
- Doubling the standard deduction from $6,000 to $12,000 for individuals and from $12,000 to $24,000 for those married filing jointly.
- Creation of a new tax credit for non-child dependents while increasing the current child tax credit.
- Elimination of most itemized deductions but keeping the mortgage interest and charitable giving deductions. Tax incentives for retirement saving and education plans will be retained; i.e SEP, Traditional, Roth IRA’s and 529 college saving plans etc.
As far as business & corporate taxes, this proposal is just as ambitious. In President Trump words: “This will be the lowest top marginal income tax rate for small and midsize businesses in this country in more than 80 years…”. Under this plan, businesses and corporations would see:
- A decrease in overall tax rate from 35% to 20%
- A new tax rate of 25% for “pass-through” income for businesses like sole proprietorships and partnerships which currently make up nearly 95% of all businesses which are taxed at the rate of their owners.
- Limitation of the deductibility of corporate interest expenses, in exchange for the option to immediately expense business investments
- Preserves tax credits for research and development and low-income-housing from a business standpoint.
Although the tax plan has a vast amount of changes for individuals & business on many levels, the benefits overwhelming favor the affluent and business owners.
How is the Public Reacting to the Trump Tax Plan?
Proponents of this tax plan for companies are overjoyed: “An encouraging step forward in our shared goal of a tax system that delivers higher economic growth, job creation and wages that our country desperately needs.” said Jamie Dimon, the chief executive of JPMorgan Chase and the chairman of the Business Roundtable. John Stephens, the AT&T chief financial officer, said it was “A big step toward meaningful reform that would encourage more investment and job creation in the United States.”
Opponents like Edward D. Kleinbard, a tax expert at the University of Southern California law school calls Trump’s Tax Plan “a very cynical document…The extraordinary thing about the proposal is that we know that it loses trillions of dollars in revenue, yet at the same time the only people we can identify as guaranteed winners are the most affluent.” Even Republican Rand Paul recently came out against Trump’s tax plan calling it a “middle class tax hike”.
This analysis from the Tax Policy Center above clearly illustrates how the current tax proposal favors the wealthy; particularly the top 1 percent and top 0.1% them. Pay particular attention to the Share of Total Federal Tax Change. It breaks down U.S. income earners into 5 categories—from those making the least in the lowest quintile to those making the most in the top quintile. As you can see, the top quintile reaps a whopping 86.6% of these potential tax cuts! The other 4 quintiles combined would only realize 13.4% of these cuts. Parsing these numbers even further for the top quintile the majority of tax cuts go to the top 1% (79.7%) and the top 0.1% (39.6%) which equate to an average tax cut of $207,060 & $1,022,120 respectively. Most Americans don’t even come close to earning the amount of money the top 1% would gain in tax cuts.
Time & time again, Trump has pledged on the campaign trail and as President that the middle class will see the rewards of his tax cuts and it was time for the rich to pay their fair share by closing tax loopholes amongst other things. However, it is hard to come to any other conclusion than this tax plan, if passed, would overwhelmingly benefit the wealthy and not the middle class. In fact, this plan may create even more tax loopholes that would directly benefit wealthy families.
How Does Trump’s Tax Plan Affect You?
If the previous health care battles are any guide, the political fight to get these cuts enacted will be fierce and has only just begun. This means that the ordinarily taxpayer can most likely expect tax filing delays—similar or worse than in recent years—while congress bickers…especially for taxpayers who file early. It will be a while before we can really dig into the ultimate affects of whichever Trump’s tax proposal is ultimately passed. One thing is for certain: In it’s current form the only real beneficiaries to this proposal are those that make nearly a $1 million or more annually. Because of all this uncertainty and the prospect for an increase in taxes for the middle class, hiring the services of a Tax Professional this tax season may be well worth the money as they can help you navigate this complicated tax climate as well as potentially unlock benefits you might ordinarily overlook.
If you’d like more information about out how Trump’s existing or eventual tax proposal will affect you, feel free to contact us via the web or call us toll-free at (888) APRIL-15 to speak to an R&G Brenner Tax Professional.
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