Today in New York, presidential candidate Donald J. Trump released a tax reform plan. The plan would reform the individual income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code by lowering marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s on wage, investment, and business income. Furthermore, it would broaden the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. base. The plan would also lower the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate to 15 percent and modify the corporate income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . Finally, the plan would eliminate federal estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. es while eliminating step-up basis.
Changes to the Individual Income Tax
- Consolidates the current seven tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s into three, with rates on ordinary income of 12 percent, 25 percent, and 33 percent. (Table 1)
- Adapts the current rates for qualified capital gains and dividends to the new brackets.
- Eliminates the Head of Household filing status
|Table 1. Individual Income Tax Brackets Under the Trump Plan|
|Ordinary Income Rate||Capital Gains Rate||Single Filers||Married Joint Filers|
|12%||0%||$0 to $37,500||$0 to $75,000|
|25%||15%||$37,500 to $112,500||$75,000 to $225,000|
- Eliminates the Net Investment Income Tax
- Increases the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. from $6,300 to $15,000 for singles, and from $12,600 to $30,000 for married couples filing jointly.
- Eliminates the personal exemption and introduces other childcare-related tax provisions.
- Makes childcare costs deductible from total income for most Americans, up to the average cost of care in their state. The deduction would be phased out for individuals earning more than $250,000 or couples earning more than $500,000.
- Offers spending rebates, or credits of up to $1,200 a year for childcare expenses, to lower-income families through the earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. .
- Creates a new saving account for care for children or elderly parents, or school tuitions.
- Caps itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s at $100,000 for single filers, or $200,000 for married couples filing jointly.
- Taxes carried interest as ordinary income.
- Eliminates the individual alternative minimum tax.
Changes to Business Income Taxes
- Reduces the corporate income tax rate from 35 percent to 15 percent. Unlike previous versions of the plan, this 15 percent rate would not apply to pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es.
- Eliminates the corporate alternative minimum tax.
- Allows firms engaged in manufacturing in the U.S. to choose between the full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of capital investment and the deductibility of interest paid.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Enacts a deemed repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. of currently deferred foreign profits, at a tax rate of 10 percent.
- Increases the cap for the tax credit for employer-provided day care under Sec. 205 of the Economic Growth and Tax Relief Reconciliation Act of 2001 from $150,000 to $500,000 and reduces its recapture period from 10 years to 5.
- Eliminates federal estate and gift taxes but disallows step-up in basisThe step-up in basis provision adjusts the value, or “cost basis,” of an inherited asset (stocks, bonds, real estate, etc.) when it is passed on, after death. This often reduces the capital gains tax owed by the recipient. The cost basis receives a “step-up” to its fair market value, or the price at which the good would be sold or purchased in a fair market. This eliminates the capital gain that occurred between the original purchase of the asset and the heir’s acquisition, reducing the heir’s tax liability. for estates over $10 million.
The best early takeaways one should consider from this plan are that it’s a sizable tax cut, spread between corporations and individuals. However, it is not nearly as large a tax cut as the plan that Donald Trump released last year, which would have reduced revenues by more than $10 trillion over the next decade. Presidential candidate Hillary Clinton has criticized previous proposals for increasing the debt by too much.
A full Tax Foundation analysis of this new Trump plan will be coming soon, outlining its benefits and drawbacks.Share