Late last month, President Trump announced a new tax plan that would radically reorder the entire American tax code. A skeleton outline of the plan was unveiled at the White House in a single-page statement. There was little detail offered about many of the points the outline delineated, nor explanations of how, exactly, it would be financed. While questions abound about the president’s tax reform plan, given the information available, here is what you should know.
It would benefit most taxpayers – but the biggest windfalls would go to the wealthy. Trump’s proposed tax reform would benefit the majority of households in the U.S., and it would streamline the filing process, making things simpler. Notably, the current seven tax brackets would be streamlined into three: 10 percent, 25 percent, and 35 percent (though, it is still unclear to which income brackets those percentages would apply).
The highest bracket of 35 percent is a reduction from the current 39.6 percent, which is good news for the wealthiest Americans. Overall, the plan appears to favor those at the highest end of the income scale. The Tax Policy Center estimates that the top 1 percent of households in the U.S. would see a 14 percent increase in after-tax income, whereas lower-income Americans would see increases of just 1.2 percent and 1.8 percent, respectively.
The standard deductions would double, but most other deductions would be eliminated. The standard deductions under Trump’s new plan – which are currently $6,350 for single people and $12,700 for married couples – are slated to double. That means that many low-income Americans and potentially even some with moderate incomes wouldn’t pay any taxes. It is estimated that about 7 out of 10 Americans take the standard deduction, and they would all benefit.
The downside is that virtually all other deductions, with the exception of the mortgage interest deduction and the charitable contribution deduction, would be eliminated, including state and local taxes and medical expenses. However, it should be noted that the remaining 3 out of 10 Americans that currently rely on these other deductions as opposed to the standard deduction would likely save in the long run under the new plan given the increase in the standard deductions.
It could cost America $6 billion over the course of a decade. It’s impossible to pin down a precise estimate of just how much the Trump tax plan would cost America, but both the conservative Tax Foundation and the more centrist Urban-Brookings Tax Policy Center estimate that Trump’s last plan would cost at least $6 billion over the course of a decade, which, needless to say, is quite a lot of money.
And, depending what elements of his plan actually go through, the cost could shoot up. For example, the Tax Policy Center estimates that a 15 percent rate for corporations and businesses that pay taxes via the tax returns of their owners would add up to a staggering $3.4 trillion over the course of 10 years.
In conclusion, while President Trump’s tax reform plan would certainly be quite a shake-up for the US, it remains unclear if legislation will go through. The House is just beginning to return to Washington after a week of recess, and the House Ways and Means Committee are planning to hold first hearings on tax reform on Thursday. While there is hope that a tax reform bill will be written and passed this year, it remains unclear how feasible that will be.