Details of the Donald Trump Tax Reform Plan, September 2016

September 15, 2016

Alan Cole

Alan Cole

Introduction

Today in New York, presidential candidate Donald J. Trump released a tax reform plan. The plan would reform the individual income tax code by lowering marginal tax rates on wage, investment, and business income. Furthermore, it would broaden the individual income tax base. The plan would also lower the corporate income tax rate to 15 percent and modify the corporate income tax base. Finally, the plan would eliminate federal estate and gift taxes while eliminating step-up basis.

Changes to the Individual Income Tax

  • Consolidates the current seven tax brackets 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
33% 20% $112,500+ $225,000+
  • Eliminates the Net Investment Income Tax
  • Increases the standard deduction 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 credit.
  • Creates a new saving account for care for children or elderly parents, or school tuitions.
  • Caps itemized deductions 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 businesses.
  • Eliminates the corporate alternative minimum tax.
  • Allows firms engaged in manufacturing in the U.S. to choose between the full expensing 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 repatriation 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.

Other Changes

  • Eliminates federal estate and gift taxes but disallows step-up in basis 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.

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A 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.

A 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.

An 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.