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Republican presidential candidate Donald Trump has a rather ambitious plan to slash the tax bills of virtually all Americans. While this would undoubtedly add to the national deficit, Trump argues that his changes would more than make up for the cost by stimulating economic growth. Specifically, here are five tax changes Trump wants to make if elected president.
1. Lower tax rates for all Americans
If two words could describe what Donald Trump wants to do to the U.S. tax system, "simpler" and "lower" would do it.
Trump has proposed consolidating the seven tax brackets we have now to three, with the following income ranges and marginal tax rates:
In addition, the alternative minimum tax would be repealed, as would the 3.8% Obamacare tax on certain investment income. It's also worth noting that these tax brackets eliminate the marriage penalty -- that is, the income ranges for married filers are exactly twice as much as for single filers.
2. Increasing the standard deduction
Another way the Trump plan aims to reduce taxes for Americans -- particularly those in the lower income brackets -- is to increase the standard deduction to $30,000 for married joint filers and $15,000 for singles, a dramatic increase from $12,600 and $6,300, respectively.
The trade-off is that personal exemptions will be eliminated, but this still works out favorably for families with two or fewer children, and overall, should work out favorably for most families considering the plan's child care benefits (more on that shortly). Also, the favorable head-of-household filing status will no longer be available.
3. Repeal of the estate tax
Most republicans want to get rid of the death (estate) tax. The logic is, taxes were paid on that money when it was first earned, so an estate tax effectively taxes the same money twice. Under Trump's plan, capital gains on investments and other assets held until death may be subject to tax, thereby assuring that all of the money involved in large inheritances is taxed once, but not more.
Currently, the estate tax only applies to passed-on wealth over $5.45 million in value, so critics argue that this is a tax break that only helps the rich. While nobody is arguing that repealing the estate tax would help low-income taxpayers, the issue here is more about fairness and not taxing the same income again and again as it's passed on.
4. Better tax breaks for child care
The deduction for child care expenses would get much more lucrative under Trump's plan. Except for couples earning more than $500,000 or singles earning more than $250,000, taxpayers will be allowed to take an above-the-line deduction for child care, capped at the state average cost of care. Of course, the magnitude of this change depends on where you live, but it should be more lucrative than the current tax break.
As of the 2015 tax year, the maximum child care credit is worth either 35% or 20% of up to $3,000 in expenses -- so a maximum of $1,050, although only low-income taxpayers get the 35% rate. According to the National Association of Child Care Resource & Referral Agencies, the average cost of center-based day care is $11,666 per year, and can be as high as $18,773. Using the average, a taxpayer who falls into Trump's 25% bracket would save more than $2,900 per year, per child. This could really help out families with more than two children, as the current credit gives no additional benefit for more than two.
Trump's plan has additional child care benefits for low-income taxpayers, including rebates through the Earned Income Tax Credit, and matching contributions to Dependent Care Savings Accounts of up to 50%.
5. Lower taxes for businesses
This is one area where politicians on both sides of the aisle agree -- our business tax system needs an overhaul. Even President Obama has proposed lowering the top corporate tax rate. Where they disagree is how to change it.
Trump wants to drastically reduce the business tax rate from a maximum of 35% to just 15%, and eliminate the corporate alternative minimum tax. He also wants to allow U.S. corporations to repatriate profits held abroad at a one-time discounted tax rate of 10%.
In addition, Trump wants to increase the tax credit available to businesses for providing on-site child care to $500,000 per year (currently $150,000). And, businesses that pay a portion of employees' child care expenses can deduct those contributions.
But at what cost?
In order to accurately weight the pros and cons of Trump's tax plan, it's important to remember that all of these tax breaks are going to have to be paid for somehow. Since being revised earlier this year, Trump's plan won't cause the projected $10 billion increase in our national debt that experts had originally projected, but it's unlikely to be revenue-neutral as Trump has claimed. While there isn't any recent formal analysis of the revised plan, most experts still think it will add trillions to the debt.
In fairness, Trump has made some valid points. Specifically, with interest rates at historic lows, Trump has said that now isn't the worst time to borrow money, especially if doing so could potentially stimulate our economy for a long period of time. Also, our infrastructure could really use a facelift -- and could put people to work.
American voters need to decide if the benefits of Trump's plan outweigh the costs. Is it worth adding trillions to an already high national debt for the possibility of economic growth?
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