(PHOTO COURTESY OF GAGE SKIDMORE VIA FLICKR)

Taxes According to Trump

An analysis of his tax reform plans

Most candidates have a plan to reform the tax code when running for office, but the system has not changed since 1986. As the field narrows down to probable nominees, the voters should examine the details of all of the plans with more scrutiny than ever. Republican candidate Donald Trump’s tax plan is significantly different than the current system and thus requires even more attention. Frank Vinci, a New Jersey Certified Public Accountant (CPA), and Bartholomew Moore Ph.D., an associate professor of economics at Fordham University, were consulted for this piece.

What are the most commonly discussed types of taxes?

According to Investopedia, an investing education site, personal income tax is a “tax that governments impose on financial income generated by all entities within their jurisdiction.” Payroll tax is “a state and federal tax that an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee.” Estate taxes are “levied on an heir’s inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law.” Corporate tax “is a levy placed on the profit of a firm, with different rates used for different levels of profits.”

What are the current tax brackets for personal income?

(CHART COURTESY OF TaxFoundation)

The complete tax bracket chart (left) gives details of all of the current estimated tax rates, but a good representation would be to specifically look at the lowest-income group, a middle-income cohort, and the highest-earning bracket.

In the current system, individual taxpayers who make less than roughly $9,300 have to pay a 10 percent income tax.

The median income in the United States per household is $52,250. For the sake of argument, consider that household to be a couple filing jointly. In that case, they would owe $1,855 + 15 percent of the amount earned over $18,550.

At the highest individual tax rate (salary over $415,051), taxpayers owe approximately $120,529.75 and 39.6 percent of the amount earned over $415,050.

What is Trump’s proposal for personal income tax brackets?

Trump plans to reduce tax rates across the board. Additionally, he wants to reduce the number of brackets in an attempt to simplify the tax code. The following numbers are pulled from an article on the Motley Fool, a financial and investment analysis site, which calculates what the new brackets would look like, based on Trump’s plan.

For the lowest income bracket, Trump’s tax reform plan states that “if you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax.”

For married filers with a household income between $50,000 and $100,000, the tax rate would be 10 percent. For salaries between $100,000 and $300,000, the tax rate jumps to 20 percent.

At the very top income level ($150,000 and up for single filers, $300,000+ for married), Trump’s tax plan will levy a 25 percent income tax.

What is Trump’s proposal for corporate income tax and the estate tax?

Trump’s campaign website states that “No business of any size, from a Fortune 500 to a mom-and-pop shop to a freelancer living job to job, will pay more than 15 percent of their business income in taxes,” which is considerably lower than the approximately 39 percent that corporate income is currently subjected to, according to the Tax Foundation, a think tank that researches and analyzes federal and state tax policies.

“Corporate income tax revenue accounts for about 23 percent of personal income tax revenue. If we can bring more corporations back to our country that would have to increase jobs, which would increase the personal income tax collected,” Vinci said.

According to Trump’s campaign website, “No family will have to pay the death [estate] tax.”

Are there economic benefits to lowering taxes?

Moore described two methods of projection.

A supply-side approach argues that lower tax rates will increase the incentive to work and to invest and therefore increase the long-run growth rate of real income. There’s little doubt that extremely high tax rates act as a disincentive. But the empirical evidence is that the supply-side effects tax-rate reductions in the U.S. are very weak. This is probably because current rates do not act as a strong disincentive.”

“A Keynesian (demand-side) approach argues that tax cuts increase disposable income and this stimulates consumption demand, causing a (temporary) stimulus to real income. There is some empirical evidence to support this but the effects are surprisingly weak: a $100 billion tax cut will cause an increase in real growth domestic product (GDP) of less than $100 billion.”

What does simplifying the tax code entail?

“Many people are in favor of tax simplification as a general principle but oppose to eliminating specific policies that make the tax code more complicated.”

“When we blame politicians or lack of cooperation between the parties we ignore that the politicians and parties are responding to the contradictory demands of their voters,” Moore said.

What are the benefits of simplifying the current tax code?

“I don’t know how many pages are in the tax code, but it’s safe to say there are many thousands of pages. If this code was simplified it would have to drastically reduce the number of tax loopholes,” Vinci said.

“I’m a CPA and to be honest, the tax code needs to be simplified.”

The flat tax system proposed by Senator Cruz seems even simpler. Would it work even better?

According to Cruz’s campaign website “Under the Simple Flat Tax, the current seven rates of personal income tax will collapse into a single low rate of 10 percent. For a family of four, the first $36,000 will be tax-free.”

“First, since Federal Net Outlays (transfers of money for various services) as a percent of GDP are about 20 percent, a 10 percent flat tax on all income is just not realistic: The tax rate would have to be around 20 percent.” Moore explained.

How will Trump’s tax plan affect federal income?

According to a Tax Foundation article on the budgetary impact of Trump’s proposed plan, they estimate that, it will “reduce revenues by approximately $10.20 trillion over the next decade,” primarily due to the loss of personal income tax. The article also states that “the changes to the corporate income tax will reduce revenues by an additional $1.54 trillion,” and “($238 billion) due to the elimination of the estate tax.” They do state however, that if they “account for the economic growth that the plan would produce [in their projections],” the total revenue lost would end up around $10.14 trillion.

How is tax revenue used by the Federal Government?

(CHART COURTESY OF CBPP)

According to a chart (left) created by the Center on Budget and Policy Priorities (CBPP), a progressive U.S.-based think tank that analyzes budget policies, personal income tax is the largest source of federal tax revenue.

The CBPP also states that 24 percent of this budget went towards Social Security, 25 percent went towards the health insurance programs: Medicare, Medicaid, Children’s Health Insurance Program (CHIP), and Affordable Care Act (ACA). Another 10 percent went towards Safety Net programs, including SNAP (food stamps) and Child Tax Credits.

How does lowering tax rates across the board affect entitlement programs (Social Security, Welfare, Medicare, Medicaid)?

According to the Motley Fool, “Trump’s proposal would actually wind up reducing the income the federal government takes in, which means the national deficit would probably continue to grow, and long-term funding to these entitlement programs would be somewhat clouded.”

“I believe if you cut tax rates the economy would improve, but not enough to offset the [Vinci’s estimated] $450 billion of lost tax revenue. The entitlements would have to be cut,” Vinci confirmed.

If elected, can Trump enact this plan as soon as he gets into office?

Tax plans are like any other piece of federal legislature and are subject to the same process. Presidents can propose a bill, but cannot submit it to Congress themselves. The bill must originate from the House of Representatives and go through the Senate, before the President can sign it into law. Neither Trump, nor any of the other presidential candidates, can guarantee that their tax plan is passed.

The Republican Party currently controls both the Senate (54 to 44) and House of Representatives (246 to 188), but that is subject to change with the elections in November since 34 Senate seats and all of the House of Representative seats are up for election in 2016.

When is the last time the system was changed?

The tax system has not changed drastically since 1986, even though it is adjusted every year to account for inflation and to prevent bracket creep, which according to Investopedia, is “a situation where inflation pushes income into higher tax brackets. The result is an increase in income taxes but no increase in real purchasing power.”

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