Tax plan impact a mystery for the middle class, but not for Trump
WASHINGTON — Who are the winners and losers in the new Republican tax plan?
For the middle class, in particular, it's hard to tell.
Experts say the net effects on lower- and middle-income Americans are hard to determine, while the potential gains for ultra-wealthy Americans and businesses are larger and more concrete. Here's a look at the key provisions of President Donald Trump's proposals.
How will an average family fare?
For individuals, the plan collapses the tax brackets from seven rates into just three: 12 percent, 25 percent and 35 percent. The bottom rate would go up from 10 percent, the top would go down from 39.6 percent.
It appears to get rid of most deductions, explicitly keeping only those on mortgage interest and charitable donations, while raising the standard deduction most filers take to $12,000 for single filers (up from $6,350) and $24,000 for married couples (up from $12,700).
The most controversial deduction that's gone is for state and local taxes, which would disproportionately affect filers in states with higher taxes like New York, New Jersey and California. The deduction provides the most benefit to upper-middle-class and wealthy income filers, who could see their taxes go up as a result under the Trump/GOP plan.
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On paper, the biggest beneficiaries of the individual changes are low- and middle-income single filers and childless couples who would see more earnings covered by the higher standard deduction. But some families might see a tax increase since the proposal eliminates the personal exemption that filers currently claim for each taxpayer and dependent. Senior citizens and the blind currently also receive an additional deduction that could be affected by the proposal.
"Based on the details of the plan that have been released, a married couple with two kids earning [under] $79,583 a year would pay more under the Trump plan than under existing law," said Daniel Hemel, an assistant professor of law at the University of Chicago.
But judging exactly how the changes affect people is hard, based on the available info.
The left-leaning Center on Budget and Policy Priorities concluded in a preliminary analysis that "the end result would likely be close to a wash for many low- and middle-income families," but said that it was hard to get more specific without additional information on how pieces like a new child tax credit would work.
Notably, the Trump proposal doesn’t say which incomes fall into which brackets. And while wonks are assuming that any deduction or exemption not mentioned is cut, they won’t know for sure until there’s a more detailed plan or bill.
Bottom line: If you’re trying to figure out the future of your tax bill, you need more information.
How do the rich do?
Trump has repeatedly claimed that his plan would benefit the middle class and not millionaires like himself.
"It's not good for me, believe me," he said in a speech on Wednesday.
So far, however, the evidence points to the contrary. While the middle-class gains are still ambiguous, there are multiple provisions that appear to benefit Trump’s personal income, his businesses, and especially his children.
The clearest windfall comes from ending the estate tax, which only affects individual estates larger than $5.49 million and $11 million for couples. The estate tax is currently 40 percent. Trump has claimed in the past he is worth $10 billion. If his children inherit that amount, they’d save $4 billion in taxes.
But there are other boosts as well. In addition to a lower top rate on income tax, the proposal ends the Alternative Minimum Tax, which is designed to prevent wealthy filers from using deductions to wipe out their tax bill entirely. Trump has not released his taxes, but a leaked return from 2005 showed he paid $38 million in taxes on $150 million in income, $31 million of which was due to the AMT.
The white paper on the GOP tax plan suggests it might add a higher income-tax rate later to make sure it "does not shift the tax burden from high-income to lower- and middle-income taxpayers." But some experts are doubtful any tweak to the top rate could make up for the breaks for high earners elsewhere.
"It’s about as likely as the president never tweeting again," Lily Batchelder, a professor at the NYU School of Law, said in an email.
How do businesses do?
The Republican plan would also lower the tax on pass-through income, which business owners and investors can use to pay taxes on profits, to 25 percent.
This change could create a massive incentive for wealthy earners to route their income through a business entity in order to avoid the top 35 percent income tax rate. Trump, whose business empire is organized through pass-throughs, could be one such beneficiary.
The GOP proposal says lawmakers will find a way to restrict the lower pass-through rate to small businesses, but they offered no details on Wednesday and experts are skeptical there’s any enforcement mechanism that could prevent rich investors from gaming the system with smart accountants.
"The Trump administration seems to want a plan that keeps the top 1 percent at the same tax burden as current law," Kyle Pomerleau, director of Federal Projects at the Tax Foundation, said in an email. "This is totally possible at somewhat lower rates, but I think it’s infeasible if the pass-through rate is that much lower than the ordinary income-tax rate."
The GOP proposal lowers the corporate rate from 35 percent to 20 percent. Corporate tax cuts tend to benefit wealthy investors, although proponents argue average Americans will benefit from increased investment and economic growth.
Details are scarce there, too. The plan says multinational corporations will be able to bring foreign profits back to America with no tax penalty, for example, but adds that they’ll face an unspecified reduced tax rate on global earnings in the future.
Paying for the package will be difficult. The nonpartisan Center for a Responsible Federal Budget estimates the total proposal would cost $2.2 trillion over the next decade. But lawmakers also face strong pressure from affected groups to keep breaks that benefit them, which could add to the cost. Already key lawmakers, like Rep. Pete King, R-N.Y., are upset about losing the state and local deduction.