Which Working Families Will Lose Under Trump Tax Plan?

[This post is co-authored with Kyle Rozema, the inaugural Wachtell Lipton fellow in behavioral law and economics at the University of Chicago Law School.]

Trump administration officials say that they can’t “guarantee” that their tax plan will provide benefits to all working families. But who exactly would be the losers under the Trump framework? Much depends on two features of the plan that the administration has yet to reveal: the size of the child tax credit increase and the size of the standard deduction for heads of household.

In order to assess the consequences of the Trump plan for working families, we calculated the plan’s effect on the net tax liability of families with up to $75,000 in adjusted gross income under different scenarios involving changes to the child credit and the treatment of head-of-household filers. Perhaps the most striking takeaway is that even a $500 increase in the child credit — which is what House Speaker Paul Ryan proposed last June — would be insufficient to offset the negative effects of the plan on head-of-household filers unless the administration and Congress make other changes to the framework. Indeed, single parents with incomes in the $30,000 to $40,000 range could lose hundreds of dollars under the Trump plan even if the child credit is increased by $500.

The figures below illustrate our results. We assume that all taxpayers with positive tax liability and whose adjusted gross income is below $75,000 will fall into the 12% bracket under the Trump plan. Consistent with the text of the Trump blueprint, we assume that the child tax credit will be refundable only up to $1,000 per child, and that other existing limits on refundability will remain.

We consider four possible scenarios involving the child tax credit: no increase (blue line), $250 increase (dotted red line), $500 increase (dotted green line), and $1000 increase (dotted orange line). Note that the plan itself promises to “significantly incease[]” the credit but does not say by how much. We also consider two different scenarios involving head-of-household filers. First, because the plan does not mention any increase to the standard deduction for head-of-household filers (currently $9350) but raises the standard deduction for single filers to $12,000, we assume that taxpayers currently eligible for head-of-household status will choose the more favorable single-filer status instead. We note that this first scenario seems to be more plausible given the Trump administration’s statements so far, which have included no mention of an increase in the head-of-household deduction, and given the fact that then-candidate Trump’s September 2016 tax plan would have eliminated head-of-household status altogether.

Figure 1. Effect of Trump Tax Plan on Net Liability of Working Families (No Increase to Standard Deduction for Heads of Household)

Second, we calculate the effects of the tax plan assuming that the standard deduction for head-of-household filers is $18,000. The Tax Policy Center published a preliminary analysis of the Trump plan that assumes an $18,000 standard deduction for heads of household, so we add this second scenario to facilitate comparisons between our estimates and theirs.

Figure 2. Effect of Trump Tax Plan on Net Liability of Working Families ($18,000 Standard Deduction for Heads of Household)

Raising the child tax credit by $500 and setting the standard deduction for heads of household at $18,000 would be enough to shield most working single families with incomes under $75,000 from negative tax consequences under the plan. However, if the Trump administration and Congress make only one of those two changes (if they increase the child credit by less than $500 or leave the head-of-household deduction untouched), then many working single families with incomes below $75,000 would see their net tax liabilities rise. Without further clarification on those two design elements, working families cannot be confident that the Trump plan will provide them with relief.