Trump’s Team Put Together a Preview of Their Tax Thingy-Ma-Jigger — Part 1
So Far It Sucks
Like the preview of the next Tyler Perry film, Trump has put out an early tax plan that isn’t promoting forward progress in any way, and only leads to further trouble. We knew this day was coming. Hell, in my master’s program we often talked about how his ideas were the most interesting (Note: interesting does NOT mean good). I took the time to sit through the April 26th announcement which was like a bukkake party over a plan that can only be described as a high schooler’s outline for a bullshit research paper.
Apparently, the republicans are on board, so we can count on some sort of tax policy push in the near future. This means that this warrants coverage and analysis. There is no “tax perspective” here, it is THE perspective. My stupid niche knowledge finally has a place!
So let’s look at the details we were given.
Before I jump into analyzing and picking this apart, I want to provide some caveats. This, like the recently released budget plan, is a proposal. It is important that it is a guideline for the future work, but it is in no-way solid. Sort of like how the “solid” plan to repeal Obamacare turned into a complete shit-show and didn’t happen.
So let’s first step into the individual side of things.
Despite how lacking in detail it is, there’s a lot to unpack here, which means I cannot break this shit down in a single article and cover everything. Because a lot of this is subject to change as well, It doesn’t make sense to calculate a lot of proposed items that depends on other things being determined (e.g. tax increases/decreases, what all debits and credits go away, etc.).
However, there is a theme that stands out to me, and I want to bring it to everyone’s attention, but first: let’s talk about each item specifically.
Reducing the tax brackets was last done in 1986/1987 during the Reagan administration. . That’s when we recodified the tax code and is why you will see “The Internal Revenue Code of 1986,” cited by tax-types. There’s been multiple recodifications (3 in fact, with the first actually creating the code), so this is not a new idea. At the time, the tax brackets were reduced to 4 (not including the 0% tax bracket. They gave no direction as to what the boundaries of tax brackets will be, but we can kind of determine the 0% bracket.
We first take the taxable income of zero, because a single dollar would be taxable. We add to that the standard deduction, which Trump has stated he would double, and we would get the Adjusted Gross Income maximum to not be taxed. I need to stress that this is not the basic gross income, and we cannot determine that because Trump has not indicated what sorts of deductions are not going to be allowed. Here is what that calculation looks like.
In a world where there are no deductions, the max amount of money one could have before taxation is simply their standard deduction. This fact alone, without any other information, would mean that less lower-income households are going to be subject to taxation, possibly lowering their effective tax. However, there could be a lot of changes to influential credits that would actually hurt lower-income households, such as a removal of the Earned Income Tax Credit, the Education Credits, Child Tax Credit, etc.
On the topic of deductions, Trump’s team basically stated that they are going away, but gave specific notice that a few things would be “protected,” whatever that means:
- Child and dependent care
- Home ownership
- Charitable deductions
If Trump is successful in getting rid of itemized deductions, it would be interesting to see what the suggestion will be for home ownership and charitable deductions, as those are both items on the Schedule A sheet for itemized deductions. Trump’s team specifically stated that State and Local tax deduction would go away.
Home ownership and charitable deductions tend to benefit those in the upper echelon, but the benefits that come from high itemized deductions are currently undone by the Alternative Minimum Tax (AMT), which is another thing on the chopping block for Trump. This is probably the most pro-higher income households change to date, but the elimination of deductions could offset this issue. However, it cannot be determined until we have more information.
An item that would unquestionably favor high-income households is the removal of the 3.5% Net Investment Income Tax, which is essentially a tax on investments made by high-income households ($250,000 or more income a year). It’s primary purpose was to help fund the Affordable Care Act (ACA). Removing this would lower high-income effective tax rates, and also marginally defund ACA to some extent. This would hurt lower income households while giving high-income households a break on their investments, which typically receive tax rates lower than many tax brackets anyway.
The removal of the “death” tax is probably the most egregious change in terms of favoring high-income households. What Trump and his team call the “death” tax, tax professionals call “estate tax,” because calling it the “death” tax is 100% a labeling mechanism to make it sound bad. I’m going to call it what it is: rich people not investing back into the community and economy that they were enriched and supported by, so they pass the money down to their spoiled ass children who didn’t earn it.
Technically estate tax isn’t an individual tax, it is a tax on the estate left by an individual when they pass. If you are thinking about this and say “that’s not fair, I’ve already been taxed on this money, why should I be taxed again?!” you aren’t paying attention: this isn’t a tax on YOU. YOU are DEAD. This is a tax on YOUR ESTATE. (foreshadowing: you most likely will not have enough for your estate to be taxed anyway)
This may prompt the question as to why an estate should be taxed. It’s a fair question to which I’ll present a hypothetical: I am rich. I live my whole life benefiting from a society that has been designed, regulated, and socially tailored in a way that I have benefited from the community around me. I’ve worked hard. However, my hard work paid off so well because I live in this country. My hard work in another country wouldn’t have benefited me to this degree.
My children and my friends, the people whom I am giving this money to, have not worked for this money. They are, by virtue of their relationship to me, receiving an accession to wealth (i.e. they are receiving money. This is the basis for the definition of income, which is what we are taxed on). The moment the money and assets leave my possession at death, the new owner has not been taxed on their accession to wealth. They have received income that is currently untaxed. If the onus of paying the tax was on the recipient, there would be numerous people who mismanage the funds received and would be in a massive tax hole. We’ve seen this stuff happen all of the time with lottery winners, athletes, reality TV stars, etc.
“Why tax estates at all? This seems wrong.” If you’ve read what I have stated regarding income taxation and accession to wealth and that hasn’t convinced you, I submit my final piece of support regarding the taxation of estates: The 2017 estate tax only applies to estates with value more than $5.49 million, meaning, they can give away $5.49 million completely untaxed. People with this high amount of assets can avoid the tax on the estate by having the assets go to their spouse or donated to a qualified charity. An estate tax encourages an individual to reinvest in the community that has enriched them or pay a tax at the front so the non-spouse recipient doesn’t end up in a tax debt hole.
Essentially, removing the estate tax will benefit rich recipients in that they don’t have to pay tax on assets over $5.49 million or risk being in tax debt, but it could also mean less donations to charities and public services (e.g. schools).
To cap what this could do with individuals:
- Individuals may not be taxed, they may (unlikely) be taxed more. It really depends on how the brackets are set up.
- Rich individuals will most likely see ordinary taxes reduced. With a removal of the AMT and itemized deductions, as well as a reduction in the income tax rate, they will probably come out on the lower end. This can only be determined when brackets are better fleshed out.
- Rich people will see capital gains taxes reduced from an elimination of the NIIT. Conversely, poorer individuals will be affected by a decreased funding in the ACA (which the NIIT is used to fund).
- The estates left by rich people will be untaxed, pushing the tax burden to the estate’s recipients. Charities and public services will receive less contributions, as there isn’t a tax benefit for giving the money to the community.
- high-income offspring recipients will be enriched by simply existing. The legacy of spoiled brats should continue.
So, all this said, here’s the theme: thinly veiled appeals to lower-income households with unquestionable benefits to higher-income households. However, That’s all I can discuss for now, as I am hitting my word limit. Next article, I will tackle the business side of things. Be prepared, it is a fucking doozy.