The $2 Trillion Question in Trump's New Tax Plan

By Richard Rubin Features Dow Jones Newswires

The Trump administration says a middle-class tax cut is at the center of its tax plan. But doing the arithmetic to figure out what middle-class families would pay is close to impossible.

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President Donald Trump's plan is silent so far on crucial details Americans need to calculate their tax bills, including the personal exemption and the size of the tax brackets.

Mr. Trump's plans have become less clear and less easy to calculate since the presidential campaign. Back in September 2015, well before the first Republican primary, his tax plan was a model of simplicity for middle-income households.

Individuals making under $25,000, single parents making under $37,500 and married couples making under $50,000 would get a new form from the Internal Revenue Service. They could literally write the words "I win" and pay nothing, the plan said.

What Mr. Trump proposed then was expanding what tax experts call the 0% tax bracket, a central way the U.S. makes its tax system progressive. It is a politically attractive and economically logical idea: Don't make people pay income taxes on money they need for basic living expenses. Under that original plan, 63% of Americans would pay no income tax compared with 44% in 2016, according to the Tax Policy Center, a project of the Brookings Institution and Urban Institute.

The president's latest plan for middle-income households, however, has left tax experts puzzled. That is because his one-page tax outline released in April is silent on essential details, including how the tax code will treat the personal exemption that reduces taxable income depending on family size. It sets tax brackets of 10%, 25% and 35% without establishing the income levels that divide them.

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Under current law, exemptions subtract $4,050 per person in a family from income. The standard deduction falls into one of three buckets: $6,350 for a single filer; $9,350 for someone with head-of-household status, which is often single parents; and $12,700 for married couples filing jointly.

It is pretty easy to calculate how much income goes untaxed. If you are a single person, that is one standard deduction and one personal exemption for a total of $10,400. For a married couple with two children, the amount not subject to taxes is $28,900 -- the bigger standard deduction plus four personal exemptions. On top of this, people who make below certain thresholds can get tax credits for work and children which allows them to get money back from the income-tax system, though many will still owe payroll taxes.

In the April plan, Mr. Trump proposed doubling the standard deduction, which would increase the amount of income shielded from taxes. However, the plan says nothing about how personal exemptions or head-of-household filing status would be treated, and the White House and Treasury declined to clarify.

His campaign proposals included the idea of eliminating personal exemptions, a move that could actually increase taxes on millions of households, depending on how it is set.

"You're left using a microscope and a calculator to figure out whether middle-class people will get a small tax cut or actually have their taxes increased," said Gene Sperling, a top economic-policy aide to presidents Bill Clinton and Barack Obama. "It's kind of shocking."

The personal exemption, which dates to the beginning of the modern income tax in 1913, is no minor detail. Because each person in the household gets one, it matters most to larger families.

Completely repealing it would generate about $2 trillion for the government over a decade, according to the Tax Policy Center's analysis of Mr. Trump's campaign plan.

Days after the administration rolled out its tax outline, Gary Cohn, director of Mr. Trump's National Economic Council, went on "CBS This Morning" and walked viewers through an example of a married couple making $56,000 a year. His math didn't include the personal exemption and he cited a $24,000 standard deduction for the couple, which is less than double the current $12,700.

"I really am confused why people don't understand what we're doing here, " Mr. Cohn said on May 1 before seeming to call the standard deduction the personal exemption. "You could end up with a very marginal single-digit tax rate, to no taxes whatsoever. That to me is a middle-income tax cut because you're going to owe no taxes potentially."

If the personal exemption is eliminated and the standard deduction for married couples is set at $24,000, that household would actually pay more in tax under Mr. Trump's plan, according to calculations by David Kamin, a New York University law professor and ex-Obama aide. The household's total income-tax bill would go up by $68 to $1,200.

If the standard deduction were fully doubled, to $25,400, the family would get a $73 tax cut. But a couple with three children making $56,000 would pay $60 in income taxes rather than getting a $475 net refund under current law.

House Republicans have their own approach. Under their plan, the standard deduction is increased and the personal exemptions are eliminated. But they replace the personal exemption with a $500 credit per dependent. That largely makes up the difference for households, but it is a revenue loser for the government.

Mr. Trump has talked about a tax break for child care that could fill the same void, but there aren't enough details available to figure it out.

The White House is now working with the House and Senate on a unified GOP tax plan, including on the core issue of how much of a household's income should go untaxed.

"I'm not sure exactly where we are now," said Alan Cole, an economist at the right-leaning Tax Foundation who has tracked various iterations of Mr. Trump's tax agenda. "Basically, they don't say."

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

May 10, 2017 05:44 ET (09:44 GMT)