President-Elect Donald Trump’s proposed tax plan is surprisingly very detailed. Without advocating, defending, or bashing the plan, I want to summarize what to expect.
Trump Tax Plan Easily Boosts Net-of-Tax Incomes for the Wealthy
First, Trump spoke to the “working class.” He promised to “massively cut taxes for the middle class, the forgotten people, the forgotten men and women of this country…” Disregarding the discovery that Mr. Trump himself had paid no federal income taxes in nearly two decades, he openly stated that he believed in increasing taxes for the wealthy.
Unfortunately, Trump’s plan appears to do just the opposite. Some tax analysts believe that his plan would cost American taxpayers trillions in unpayable debt and increase taxes on the middle class. Here are two examples of how his plan works:
- Example 1 – The “average millionaire” (if there truly exists such a person), would enjoy an average tax reduction of over $315,000. One contributor estimated that the top 1 percent would get about half of the benefits of his tax cuts.
- Example 2 – Working families, whose struggling annual wages fall between $40,000 and $50,000, will see an average $560 annual tax reduction.
Tax Increases Expected from Trump’s Tax Plan
As one could imagine, it is the millions of “middle-class” working families who will fill the tax revenue void under Trump. Their tax obligations dramatically rise under Trump’s plan. Even more dramatic, the increase goes to single-parent families – those typically least able to shoulder any increased tax burden. Trump proposed an elimination of the head of household filing status, as well as the current, taxable income-reducing personal exemptions.
These statistics below were sourced by the Tax Policy Center, an NPR writing contributor:
- Increase to Middle Class – A single parent with $75,000 in earnings, two school-age children, and without child care costs, would realize an annual tax increase of just under $2,500. This is an additional tax burden of another 3.33% of total income.
- Increase to Average Single Parent – Consider the Naperville, IL area statistics. An average single parent earns around $50,000 each year. Now this person, also with three children in school (and without child care expenses), still sees a tax increase of nearly $1,200. That increase is almost another 2.5% of that parent’s total income.
- Small Increase to Struggling Couples – A married couple with $50,000 or less in earnings, two school-age children (again, without child care expense) would still carry a tax increase of about $150. Other similar married couples would also get almost no benefit.
The first example, with the single parent earning $75,000, gets this tax increase partly because Mr. Trump’s tax plan eliminates the $4,000 exemption for each person in a household. That change alone yields a $12,000 increase in taxable income! This virtually eliminates the greatly anticipated tax refunds that so many families await each year.
Note that each of the examples above focused on families without child care costs. It should be noted that Trump’s Plan does emphasize reductions for families having to pay the expense of caring for children.
- A married couple with combined annual earnings of $50,000, who have 2 children and $8,000 in child care expenses, would see a tax reduction of 35 percent. This couple, on average, pays around $2900 in federal taxes. Their tax decreases to approximately $1900 under Trump’s new plan.
- Earning slightly less than the average DuPage County household, a married couple earning $75,000 with two children and $10,000 in child care expenses would be cut by 30 percent. On average, this couple would pay approximately $8500 in federal taxes, but around $6,000 under Plan Trump.
- A married couple earning $5 million with two children and $12,000 in child care expenses would enjoy reduced taxes by only 3%. However, this example-couple’s burden would be about $335,000, reduced to $325,000 by the President-Elect’s plan.
(Adapted from Trump’s campaign website)
One writer cautioned that Mr. Trump’s calculations are misleading, in that they fail to focus on how much money they have in their pocket after taxes. Instead, his calculated projections boast about tax rate reduction, instead of the more realistic concern of a family’s after-tax income.
One Trump policy insider explained the plan this way: “The single best way to help people that are in the low-income bracket or unemployed or underemployed is, No. 1, to get them employed in real jobs with real benefits,” he says. Team Trump’s logic is that by providing minor tax reductions for families paying for child care, it enables them to work, thereby “boosting” the economy. Maybe.
But this same insider argues these smaller personal income tax cuts, along with Trump’s proposal to reduce the corporate tax rate from 35 percent to 15 percent, will help taxpayers by boosting economic growth. This is the most unpopular, “trickle-down” policy, reborn.
Economists disagree on this plan being beneficial to the U.S. economy. The Tax Policy Center posits that during the first 10 years, this plan would produce huge budget deficits that would cripple the economy. Presumably so, as those same economists estimate that our U.S. government would lose $6.2 trillion in tax revenue.
That number is a big loss. To put this $6.2 trillion deficit number into perspective, think about these random statistics:
- The number looks like this: $6,200,000,000,000.
- The Iraq, Afghan war costs exceeded just over $4 trillion.
- For the fiscal year 2017, the entire United States (federal, state, and local) governmental spending, is estimated at $6.89 trillion.
- Mr. Trump could repeat his well-known 1995 tax loss of $916 Million, every day, every year, for over 18 years, and still have enough room in this deficit to instantly bankrupt California.
- McDonald’s’ is truly an economic giant. The $27 billion McDonald’s makes in revenue makes the burger chain the 90th-largest economy in the world. And yet, the McDonald’s worldwide annual revenue must repeat itself for 230 years to reach the size of the deficit created by that tax plan.
The Trump plan also eliminates the federal estate tax entirely. This tax is currently paid by only the wealthiest 1 percent of taxpayers. Virtually every economist reporting in news media agrees – ending the federal estate tax would lead to an even greater concentration of wealth in the United States.
Maybe that was the plan all along.
If you have questions regarding your own taxes, contact us today. We are the tax attorneys Naperville and Downers Grove can rely on for assistance.