Trump's individual income tax reforms could fail most Americans

It may be hard to believe, but in less than two weeks the unlikeliest of candidates when campaigning began, Donald Trump, will be sworn in as the 45th President of the United States.

Trump has a big agenda on his plate, and the fact that both houses of Congress remain controlled by Republican majorities lends credence to the belief that we could see a number of reforms take shape in the months and years to come. As outlined in his 100-day plan, Trump wants to repeal and replace the Affordable Care Act, implement a $1 trillion decade-long plan to rebuild America's aging infrastructure, and, of course, completely reform the U.S. corporate and individual income tax code.

Trump's plan to tackle individual income tax reform

The most immediate and likely impact Trump could have on the American worker is through individual income tax reforms. Trump's proposed individual income tax changes, which were revised in September, would work in two ways.

First, we'd see a complete overhaul and simplification of the U.S. tax brackets. Currently, taxpayers fall into one of seven ordinary income tax tiers, ranging from a low marginal tax rate of 10% to a high of 39.6%, as you can see below in the 2017 tax schedule.

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Data source: IRS. Table by author.

Trump's tax bracket proposal is considerably simpler. As you'll observe below, Trump is calling for just three tax tiers at 12%, 25%, and 33%, while long-term capital gains taxes would remain unchanged at a peak of 20%. If this plan looks somewhat familiar, it's because the 12%/25%/33% three-bracket individual income tax code was proposed by House Republicans last year. Trump's willingness to adopt the House Republicans' individual income tax reform proposal could be an indication of compromise in order to get legislation passed quickly once he's in office.

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Data source: Donald Trump campaign website. Table by author.

The second component to Trump's individual income tax reforms involves refining the way deductions and exemptions are taken. And by "refining," I mean simplifying and eliminating the complexity of the individual tax code.

Trump would eliminate all forms of itemized deductions, with the exception of the mortgage interest deduction and charitable giving. Meanwhile, the new tax code would boost the value of the standard deduction for all Americans to $15,000 for individuals and $30,000 for couples, which is more than double the current standard deduction. Lastly, Trump's individual income tax plan would strike a number of taxes from the record, including the estate tax, net investment income tax, and Alternative Minimum Tax.

Trump's assertion during his campaign was that his tax plan would put money back into the pockets of every American. And since we're a consumption-driven nation, putting more money into the pockets of working Americans could lead to faster GDP growth. An analysis from the Tax Foundation suggests that his individual reforms will result in a dynamic increase in GDP of 2.4% over the next decade.

But what if Trump's thesis doesn't hold water?

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Donald Trump's life leading up to the election
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Donald Trump's life leading up to the election

Bound for the rigors of business school in the future, Donald Trump received discipline at an early age by attending a military academy. There, he reportedly excelled in extracurricular activities such as being the Honor Cadet.

Donald Trump in the New York Military Academy's 1964 yearbook

Source: Classmates

As someone who loves the art of negotiation, Donald Trump was able to negotiate New York City to provide a 40-year tax abatement for the Grand Hyatt Hotel — the first ever granted to a commercial property.

(Photo by NY Daily News Archive via Getty Images)

Master renovator: Trump offered to renovate decrepit areas in need, such as a long-closed ice-skating rink, at no profit to himself, after the city's renovation effort went through five years of delays and more than double the original cost estimate.

(Photo by Michael Schwartz / (c) NYP Holdings, Inc. via Getty Images)

Trump's enterprise also stretched out into sports, where he was the original owner of the New Jersey Generals of the United States Football League.

EAST RUTHERFORD, NJ - CIRCA 1983: Team Owner Donald Trump announces he has signed Herschel Walker to play running back for the New Jersey Generals in New Jersey. Walker played for the General form 1983-85.

(Photo by Sporting News via Getty Images)

Trump owns a fleet of luxury helicopters.

Donald Trump, real estate mogul, entrepreneur, and billionare, utilizes his personal helicopter to get around on August 1987 in New York City.

(Photo by Joe McNally/Getty Images)
Trump was also notorious for befriending attractive supermodels. His first wife, Ivana, a Czech-American, was a member of the social elite.

Ivana Trump and Donald Trump are seen in December 1982 in New York City.

(Photo by Sonia Moskowitz/Getty Images)
No expense was spared for his belongings, as Donald Trump once paid the sultan of Brunei $30 million for a nearly 300-foot yacht.

American businessman Donald Trump and his wife Ivana sit at a table on board their luxury yacht The Trump Princess, anchored outside the Water Club, New York City, July 1988.

(Photo by Tom Gates/Getty Images)
To test the political waters, the potential Reform Party presidential candidate traveled to several areas to address party leaders.

New York real estate developer Donald Trump (L) answers questions as Minnesota Governor Jesse Ventura looks on in Brooklyn Park, January 7. Trump said on Friday he "very well might" make a run for president under the Reform Party banner but had not made a final decision. "I'm looking very seriously if I can win," he told reporters. "And if I can win, I believe I can do a very good job." Trump came to Minnesota to raise money for the party's highest elected official, Governor Ventura, who made it clear that he and the New York developer were on the same wavelength.

(STR New / Reuters)

Trump also enjoys tennis — he even played a round, wearing his traditional suit, against the legendary Serena Williams.

Developer Donald Trump talks with his former wife Ivana Trump during the men's final at the U.S. Open September 7, 1997. REUTERS/File Photo 

He also became the owner of the infamous Miss Universe beauty pageant for many years.

Donald Trump and Miss Connecticut USA Erin Brady poses onstage after winning the 2013 Miss USA pageant at PH Live at Planet Hollywood Resort & Casino on June 16, 2013 in Las Vegas, Nevada.

(Photo by Michael Stewart/WireImage)

Unbeknownst to many, Donald Trump is a formidable opponent on the green. He owns 15 golf courses.

Donald Trump announced on Saturday, 11/9/02 a major addition to his West Coast properties as he purchased the Ocean Trails Golf Club in Rancho Palos Verdes. He discussed the improvements and additions to the club to members of the Rancho Palos Verdes community on Saturday morning. Ocean Trails made headlines in 1999 when days before its scheduled opening, part of the course's 18th hole slid into the Pacific Ocean. The club will reopen in June, 2003 under Trump's direction. 

(Photo by Gary Friedman/Los Angeles Times via Getty Images)

Sometimes, negotiating can be a tough sport. What better way to exert your dominance by taking the center stage among the world's most bombastic figures?

Donald Trump, Stone Cold Steve Austin and WWE wrestler Bobby Lashley get ready to shave Vince McMahon's head after McMahons lost the main event of the night, 'Hair vs. Hair', between Vince McMahon and Donald Trump. WrestleMania 23 at Detroit's Ford Field in Detroit, Michigan on April 1, 2007.

(Photo by Leon Halip/WireImage)

As the fog of the political battlefield has cleared on the Republican side, Trump is now preparing for a likely battle with presumptive Democratic nominee Hillary Clinton.

Donald Trump (C), flanked by his children Ivanka and Donald Trump Jr., addresses the media in Chicago May 10, 2006. Trump was in Chicago to speak about his Trump International Hotel and Tower Chicago that is being built on the old site of the Chicago Sun-Times building on the north side of the Chicago River.

(REUTERS/Stephen J. Carrera)

Being the entertaining host, Trump also spared no expense in providing a spectacular show for friends and family.

 Developer and multi-millionaire Donald Trump (R) watches as ex-wife Marla Maples gets a kiss from Earl Sinclair of TV's 'Dinosaurs' during lunch at the Trump Plaza Hotel November 2, 1992. REUTERS/Henry Ray Abrams

As a self-proclaimed family man, Trump attended many public events and television shows with his family, even before his current campaign.

 Donald Trump and Ivanka Trump attend U.S. Open Tennis Tournament on August 30, 1991 at Flushing Meadows Park in New York City. (Photo by Ron Galella/WireImage)

Source: Oprah

Trump first started showing signs of interest for a possible bid for the US presidency with the formation of a presidential exploratory committee ahead of the 2000 election.

Billionaire real estate developer Donald Trump (R) talks with host Larry King after taping a segment of King's CNN talk show, in New York October 7. Reuters

Source: Reuters

In 2005, Donald Trump married fashion designer and model Melania Trump.

Real estate magnate Donald Trump (L) and Melania Trump leave Hollinger International's annual meeting at the Metropolitan Club in New York on May 22, 2003.

REUTERS/Peter Morgan PM/ME

Source: PolitiFact

As no stranger to the political process, Donald Trump was even acquainted with members of the judicial branch.

U.S. Supreme Court Justice Clarence Thomas (L), serving as the grand marshal for the Daytona 500, speaks to Donald Trump  on the starting grid at the Daytona International Speedway February 14. JLS/ELD

Trump famously launched his presidential campaign in June 2015 by coming down an escalator in Trump Tower. Since then, he has weathered waves of controversy to become the presumptive Republican presidential nominee.

 (Photo by Christopher Gregory/Getty Images)

Trump made his final appeal to voters in swing-states as the contentious campaign drew to a close.

 Donald Trump speaks at a rally at SNHU Arena in Manchester, NH, on Nov. 7, 2016, the night before election day. (Photo by Suzanne Kreiter/The Boston Globe via Getty Images)

President-elect Trump at his election night party at the Hilton Hotel in New York City.

NEW YORK, NY - NOVEMBER 09: Republican president-elect Donald Trump acknowledges the crowd during his election night event. (Photo by Joe Raedle/Getty Images)

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Trump's individual tax reforms could fail most Americans

Despite Trump's prediction that his tax reforms will be great for America, there are two clear-cut deficiencies in his plan that could suggest otherwise.

Arguably the biggest issue with Trump's individual income tax reforms is the real possibility that it could worsen the income inequality problem in America. According to the nonpartisan Urban-Brookings Tax Policy Center, the revised Trump tax cut proposal gives 47% of the tax breaks to the top 1%.

Income inequality is often associated with slower growth potential, since lower-income individuals have fewer pathways to improve their socioeconomic status. For instance, it's more difficult for people with low income to get a college degree or skill that'll increase their chances of securing a well-paying job. It can also impact their health, with well-to-do persons often living longer since they have the income needed to pay for preventative medical care, medicine, and procedures. Nothing in Trump's individual income tax proposal suggests this is going to change or improve in the years to come.

The other problem with Trump's individual income tax reforms is that millions of lower- and middle-income Americans would actually see their taxes increase! According to the Tax Policy Center, about 8 million families would wind up paying higher taxes under Trump than they are now. In particular, Trump's tax reforms would hurt single-parent households and large families with three or more children. Currently, itemized deductions provide a bigger benefit to these households (e.g., a single parent being able to claim head of household), but the elimination of the head-of-household filing status and nearly all itemized deductions in favor of a larger standard deduction means these families, mostly lower- and middle-income, will owe more.

Money Under Chain And Lock Debt Getty
Image source: Getty Images.

An argument could also be made that Trump's individual income tax reforms could exacerbate an already growing national debt. A static analysis (i.e., not modeling out the positive and negative economic implications of Trump's proposals) by the Tax Foundation estimates that Trump's individual tax reforms will lead to a nearly $2.2 trillion reduction in federal revenue over the next 10 years. Meanwhile, the national debt is expected to increase. This means more money the federal government has to set aside to service the interest on that debt, and less money for education, infrastructure, defense, and other possible avenues to growth.

Obviously, no one knows with any certainty whether Trump's proposed individual income tax reforms are going to be a positive or negative for the U.S. economy. Only time is going to give us that answer. However, based on a number of analyses of Trump's tax plan, it may not have anywhere near its desired effect.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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