Donald Trump Tax Plan Ideas: Details and Analysis

Related: Harris Tax Proposals

Former President Donald Trump has floated several 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. policy ideas, including extending the expiring 2017 Tax Cuts and Jobs Act (TCJA) changes, bringing back the deduction for state and local taxes (SALT), reducing the corporate tax rate for domestic production, exempting various types of income from the income tax, repealing green energy tax credits, and imposing steep new tariffs.

The impact of Trump’s proposals will vary significantly depending on which combination of policies are pursued and how exactly each policy is structured.

Some of Trump’s tax proposals are well-designed and would be efficient ways to promote long-run economic growth, such as permanent expensing for machinery, equipment, and research and development (R&D).

On the other hand, some of his tax proposals are poorly designed and would worsen the structure of the tax code while only creating a muted impact on long-run economic growth, such as the exemptions for tips and Social Security income.

Worse yet, Trump’s reliance on import tariffs to offset the cost of tax cuts comes with major downsides. Tariffs are a particularly distortive way to raise revenue, especially as they invite foreign retaliation. We estimate Trump’s proposed tariffs and partial retaliation from all trading partners would together offset more than two-thirds of the long-run economic benefit of his proposed tax cuts.

As with any economic model, ours does not capture all the possible effects of the proposed tax and tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for US businesses and consumers. policies, such as changes in compliance costs, the geopolitical implications of further trade wars, the impact of different tax burdens on different sectors and types of investments, or how uncertainty affects economic decision-making.

Our estimates illustrate that Trump’s proposed tariffs threaten to offset much of the economic benefits of his proposed tax policy changes, and of those proposed tax policy changes, many move in the opposite direction of simple, pro-growth, and fiscally responsible tax reform.

Modeling the Major Provisions Proposed by Candidate Trump

Trump has suggested a wide variety of tax and tariff proposals and frequently proposes new ideas on the campaign trail. For this update of our details and analysis on Trump’s tax policies, we model the following major proposals, effective beginning January 1, 2025, unless otherwise stated:

• Making the individual TCJA expirations permanent except for the cap on SALT (effective January 1, 2026)
  • Rates and brackets
  • 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 (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
  • Personal exemption
  • Child 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. and other dependent tax credit
  • Limitations on itemized deductions (excluding SALT) and elimination of Pease limitation
  • AMT changes
  • Section 199A pass-through deduction and noncorporate loss limitation
• Making the TCJA estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. changes permanent (effective January 1, 2026)
• Restoring the TCJA business tax provisions (effective January 1, 2026)
  • 100 percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially 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.
  • R&D expensing
  • EBITDA-based interest limitation
• Reinstituting the domestic production activities deduction (DPAD) at 28.5 percent to lower the effective corporate tax rate for domestic production to 15 percent
• Exempting tips from income taxes
• Exempting Social Security benefits from income taxes
• Exempting overtime pay from income taxes
• Creating an 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. for auto loan interest
• Eliminating the green energy subsidies in the InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. Reduction Act (IRA)
• Raising current Section 301 tariffs on China to 60 percent
• Imposing a universal tariff on all US imports of 20 percent
• Foreign retaliation of 10 percent on all US exports plus additional in-kind tariffs on US exports to China

We exclude from our formal modeling an idea floated by vice presidential candidate Sen. JD Vance (R-OH) to increase the child tax credit to $5,000—as the campaign has not confirmed support of the proposal—as well as Trump’s recent proposal to end double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of Americans abroad, though we include the potential cost of both policies in our range of potential budgetary estimates below.

Economic Effects of Trump’s Tax Proposals

Using the Tax Foundation’s General Equilibrium Model, we estimate Trump’s tax proposals would increase long-run GDP by 0.8 percent, the capital stock by 1.7 percent, wages by 0.8 percent, and employment by 597,000 full-time equivalent jobs.

We estimate the proposals would increase the 10-year budget deficit by $3 trillion conventionally and $2.5 trillion dynamically. The debt-to-GDP ratio would increase from its long-run projected level of 201.2 percent to 223.1 percent on a conventional basis and 217 percent on a dynamic basis. Increased deficits and a higher debt load would require higher interest payments on the debt that would reduce American incomes as measured by GNP by almost 0.8 percent; the higher interest payments drive a wedge between the long-run effect on output of 0.8 percent and the long-run effect on GNP of -0.1 percent.

Permanence for the individual, estate, and business tax provisions of the TCJA would increase long-run economic output by a combined 1.1 percent when modeled with the cap on SALT deductions limited to $10,000. However, if Trump’s proposal to “get SALT back” means discontinuing the $10,000 SALT cap, removing the cap from TCJA permanence would boost GPD by an additional 0.7 percent, as the SALT cap creates a burden on labor income as well as housing investment.

Exempting tips, Social Security, and overtime pay from the income tax together boost long-run output by 0.4 percent, most of which comes from exempting overtime pay. Creating an itemized deduction for auto loan interest would lead to a slight additional boost in output.

We modeled Trump’s proposed 15 percent corporate tax rate for domestic manufacturing as a restoration of the prior DPAD set at 28.5 percent to reach an effective corporate tax rate of 15 percent. By lowering the effective corporate tax rate for a subset of corporations, it would increase long-run economic output by 0.2 percent.

Trump has also proposed eliminating the green energy tax credits put in place by the IRA. Because the IRA tax credits are temporary expansions, we do not find a long-run economic impact from eliminating them.

We estimate the proposal to impose a universal 20 percent tariff on all imports plus additionally raise the tariff on imports from China to 60 percent (the current Section 301 tariffs result in a weighted-average tariff rate on imports from China of about 10 percent), would shrink long-run economic output by about 1.3 percent. To illustrate the potential harms from foreign retaliation, we estimate the impact of a 10 percent tariff on all goods exports plus additional in-kind retaliation on US goods exports to China. We estimate retaliation would reduce US GDP by an additional 0.4 percent in the long run while raising no additional revenue for the US government.

Revenue Effects of Trump’s Tax Proposals

On a conventional basis, we estimate Trump’s proposed tax changes would reduce federal tax revenue by $3 trillion from 2025 through 2034. The revenue loss falls to $2.5 trillion on a dynamic basis.

Permanence for the individual provisions of the TCJA would reduce revenue by $3.4 trillion if the SALT cap is made permanent, but extending the individual provisions without a cap on SALT would add another $1 trillion to the 10-year estimate, resulting in a combined $4.4 trillion reduction in revenue. Permanence for the estate tax changes would reduce revenue by $205 billion while permanently reversing the phaseout of bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , the amortization of R&D expenses, and the tightening of the business net interest deduction (restoring the deduction to 30 percent of EBITDA rather than EBIT) would reduce revenue by another $643 billion. Altogether, permanence for the individual, estate, and business tax provisions without a cap on SALT would reduce revenue by $5.3 billion. Retroactive restoration of the business tax provisions could add billions more that we do not account for here.

The five additional major tax cuts proposed by Trump—exempting tips, Social Security, and overtime pay from income tax; creating an itemized deduction for auto loan interest; and lowering the corporate tax rate to 15 percent for domestic production—add another $2.5 trillion to the 10-year revenue reduction.

To offset part of the nearly $7.8 trillion of tax reductions, Trump has proposed repealing the IRA green energy credits, which we estimate would raise about $921 billion over 10 years, and imposing steep new tariffs, which we estimate would raise about $3.8 trillion over 10 years.

Distributional Effects of Trump’s Tax Proposals

Overall, Trump has outlined significant tax cuts that would increase after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. on average by 1.6 percent in 2025 and by 2.2 percent in 2034. The difference between 2025 and 2034 is primarily because the TCJA provisions do not expire until 2026, and so extending them does not have an effect in 2025. On a long-run dynamic basis, we estimate that after-tax incomes would increase by 2.8 percent on average, reflecting the 0.8 percent increase in economic output under the plan.

However, the tax changes Trump has proposed would not be felt evenly across all income groups. In general, Trump has proposed tax cuts that provide a larger relative benefit to higher-income taxpayers, while his major proposed offset of higher import tariffs falls harder on lower- and middle-income taxpayers.

In 2025 and 2034, we estimate the bottom 40 percent of households would see tax increases, on average, with after tax income falling by 0.9 percent and 0.6 percent for the bottom quintile and by 0.7 percent and 0.4 percent for taxpayers in the 20^th to 40^th percentile. Middle income taxpayers would see very slight tax cuts on average, with after-tax income increasing by 0.1 percent in 2025 and by 0.3 percent in 2034. The top two quintiles would see the largest increases in after-tax income, ranging from 1.2 percent to 1.4 percent for taxpayers in the 60^th to 80^th percentile and from 2.4 percent to 3.1 percent for the top quintile. Increases for the top 1 percent are even larger, reaching 4.1 percent in 2034. In the long run, accounting for economic growth, all income groups would see an increase in after-tax income, although higher income earners would see a larger increase.

Potential Deficit Impact of Trump’s Tax Proposals

Across the major proposals we formally scored, we estimate revenue would fall by $3 trillion on a conventional basis and by $2.5 trillion on a dynamic basis from 2025 through 2034. Trump’s proposals could be interpreted even more broadly, for example, the exemptions for overtime pay and tips could apply to the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. in addition to the income tax. Sen. Vance has also floated the idea of a more broadly available $5,000 child tax credit, but the campaign has not confirmed support for the idea.

Trump also recently proposed ending the taxation of American’s abroad, which would further reduce revenue. Under current law, Americans are taxed on their worldwide earnings even if they live and earn income abroad. Some taxpayers can use foreign tax credits and the foreign earned income exclusion (FEIE) to reduce or entirely offset their US tax liabilities, but they must still navigate a complicated US tax filing process and sometimes pay tax twice to the US and to the foreign country where they reside.

Trump would move the US to a residence-based tax system for individuals living abroad so they could forego filing and paying US income tax. This proposal would likely reduce federal revenue by between $50 billion and $100 billion over 10 years on a conventional basis. This revenue loss could be offset via new revenue from transition taxes or fees under the new regime, but Trump has not yet specified such details.

Considering these other potential tax cuts, we find Trump’s tax plans could reduce revenue by nearly twice as much as our formally scored estimates indicate, potentially adding up to $6 trillion in net tax cuts over 10 years.

Modeling Notes

TCJA Permanence

We assume TCJA permanence entails the following changes, described here in our recent publication:

• Lower rates and reconfigured brackets
• Larger standard deduction
• Eliminated personal exemption
• Larger child tax credit
• Limited itemized deductions for home mortgage interest and miscellaneous expenses but allow unlimited SALT deductions
• Eliminated Pease limitation
• Larger AMT exemption and exemption phaseout thresholds
• 20 percent deduction for 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. income and limitation on noncorporate losses
• Larger estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax.
• 100 percent bonus depreciation
• Expensing for research and development
• Deduction for net interest limitation based on EBITDA

Tariffs

To model the economic effects of tariffs, we treat them as an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. applied to US imports. As an excise tax, tariffs create a wedge between the price a consumer pays and the price a producer receives. In Tax Foundation’s modeling, we hold the price level constant, passing tariffs back to the factors of production. In other words, tariffs reduce the amount of revenue businesses have to compensate their workers and shareholders, resulting in a reduction in real incomes.

To model the revenue effects of US-imposed tariffs, we first shrink the 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. using an elasticity of import demand of -0.997. From there, we multiply the import tax base by the inclusive tariff rate (the rate divided by one plus the rate) to estimate initial tariff revenue. To estimate how total tax revenue changes, we apply a compliance rate of 85 percent, based on the average tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. , and income and payroll tax offsets of approximately 27 percent. If imports are more responsive than we have estimated, tariff revenues would be lower. On a dynamic basis, revenue falls further as tariffs and foreign retaliation result in a reduction in real incomes and output.

15 Percent Rate for Domestic Production

We modeled Trump’s proposal for a 15 percent rate on domestic production as a restoration of the DPAD that was in effect from 2004 to 2017. To reach an effective tax rate of 15 percent, we set the deduction value at 28.5 percent ((21% * (1 -.285) = 15%)).

Tips

To estimate the revenue effect of exempting tips from income tax, we projected a baseline of tip income by taking tips as a share of total wage income based on 2018 data, assumed a 10 percent increase in tips, and applied the marginal tax rate on wages faced by taxpayers making between $30,000 and $40,000 under TCJA policy.

Auto Loan Interest Deductions

We use data from the Survey of Consumer Finances (SCF) to estimate auto loans held by households at different income levels and derive the interest payments on auto loans by income level. We use Tax Foundation model data to estimate itemized deductions of these interest payments and conventional revenue effects and distributional impacts over the budget window. We grow the revenue over the budget window by changes in projected aggregate auto loan amounts and CBO’s forecast of future interest rates. We model the macroeconomic effect of this proposal as a reduction in the 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. on wage income.

Overtime Pay

We relied on the Consumer Population Survey (CPS) data to formulate a baseline estimate of overtime pay of 2.65 percent of salary and wage income overall, while the shares vary by quintile. We modeled overtime pay as a fixed portion of income by quintile, facing the marginal rate on wage income for each quintile under TCJA policy.

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