Last week, the Trump Administration released its tax proposal, titled “Tax Reform: Unified Framework for Fixing Our Broken Tax Code.” Many observers have characterized it as short on reform but long on tax cuts, especially for the wealthy. I agree with them.
Although it is a little more fleshed out than the vague outline the administration released earlier, the proposal still leaves a lot of specific details up to Congress. Although it would reduce the number of personal income tax brackets from seven to three, it does not specify the thresholds for the new brackets; nor does it specify the size of the increased child credit that will replace the personal exemption for dependents. The White House has used the lack of detail to deflect criticism, claiming that the critics don’t know enough yet to assess the impact on taxpayers at different income levels.
However, that hasn’t stopped the President and his supporters from making some sweeping claims of their own about who will benefit most. The stated goals include “tax relief for middle-class families” and “tax relief for businesses, especially small businesses.” They say nothing about benefits for the wealthy. Trump himself claims that the plan will “put more money into the pockets of everyday hardworking people,” and that “I don’t benefit” from the changes. That may be the biggest falsehood he has ever told, and that’s saying a lot.
The proposal would cut taxes for the wealthy in at least five ways.
Personal income tax rates
The current law taxes personal income in seven income brackets, at rates ranging from 10% to 39.6%. The proposed system would have only three rates: 12%, 25% and 35%. Immediately we can see that top incomes get a reduction, although it is less clear than lower incomes do.
Although the thresholds for the new brackets are not definite, the analysis by the Tax Policy Center made the reasonable assumption that they will resemble the thresholds proposed by House Republicans in their 2016 tax plan, which Donald Trump praised when he was running for President. Based on those thresholds and other features of the proposal, the Center estimated how taxpayers in each of the five quintiles of income would be affected. (Quintiles are not the same as tax brackets, but just divisions of the population into fifths.)
In 2018, when the plan is assumed to go into effect, taxpayers in the top quintile would average a tax cut of $8,470, and they would receive 74.5% of all the tax cuts distributed. Taxpayers in the middle quintile would get an average tax cut of only $660. Even more startling, the richest 1% of taxpayers would get an average tax cut of $129,030, and by themselves get 53.3% of all the tax cuts.
It gets worse over time. By 2027, the average cut for the 1% would reach $207,060 while the average cut for the middle quintile would fall to $420. By then 79.7% of all the cuts would be going to the 1%. (Why one group’s tax cut goes down while another’s goes up has to do with how various features of the tax code are indexed for inflation.)
The Trump plan includes a rather vague remedy for this apparent unfairness: “An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.” Given that almost everything in the plan favors the wealthy, translating this pledge into reality will be a very tall order, and one that Congressional Republicans are unlikely to have any enthusiasm for carrying out. (I have been reading Jane Mayer’s Dark Money, which makes a pretty good case that today’s Republican Party pursues an agenda largely dictated by their richest donors.) The leadership is prepared to pass the bill entirely with Republican votes, using the budget reconciliation process to rule out a filibuster by Senate Democrats.
Corporate tax rates
The proposal would lower the corporate tax rate from 35% to 20%. This is also a benefit mainly for the wealthy, for two reasons.
The Congressional Budget Office, US Treasury, and the Tax Policy Center agree that the owners of capital bear most of the burden of corporate taxes, with only an estimated 19-25% falling on workers.
Although many workers own a small amount of corporate stock in their retirement plans, most stock ownership is in the hands of the richest 10% of the population. Less for Uncle Sam means more for the stockholders.
Pass-through business tax rates
Small businesses such as sole proprietorships, partnerships and S-corporations pass through their income to their owners, who pay taxes on it at individual rates as high as 39.6%.
The proposal would tax such pass-through income at a maximum of 25%. However, the great majority of small business owners already pay 25% or less because their income doesn’t exceed the individual threshold of $91,000 or the married threshold of $153,100. According to the New York Times, the effective tax rate for sole proprietors is only 13.6% now. The benefits of this tax cut would go exclusively to owners with higher incomes.
The Trump framework promises “tax relief for businesses, especially small businesses,” but it would more accurately read “especially large businesses.”
Alternative Minimum Tax repeal
The AMT is an alternative tax calculation that high earners with many deductions must complete in order to keep them from avoiding their fair share of taxes. The little bit we know about Trump’s own taxes reveals that he would have paid $31 million less in taxes in just one year (2005) if it weren’t for the AMT. Repealing it is mostly another gift to folks like him.
One can argue that if the new tax law succeeds in its goal of “providing greater fairness for all Americans by closing special interest tax breaks and loopholes,” then the Alternative Minimum Tax will be less necessary. On the other hand, one could argue that it may be more necessary than ever, given all the other tax breaks for the rich in the plan.
Estate tax repeal
The estate tax has already been “reformed” to the point that it only applies to estates valued over $5.49 million. Abolishing the estate tax would benefit only the wealthy, especially people as wealthy as Trump himself, whose estate has been estimated at several billion dollars. Trump has claimed that the repeal would primarily benefit farms and small business owners, but the Tax Policy Center found that less than 1% of the estate tax revenue comes from that group.
And for the rest of us…?
Even without many of the details worked out, the wealthy appear to be the overwhelming beneficiaries of the tax proposals, which are mostly just tax cuts for them. The benefits for the middle class are smaller and more uncertain. I will elaborate on that in the next post.