Tax policy is always front and center in presidential election campaigns, and one hallmark of the 2016 presidential campaign race is that the two main candidates have very different visions for the future of the tax code. Last week, Republican presidential candidate Donald Trump released his tax reform plan, which included some details on the specific provisions he would like to see if he's elected. Below, we'll go into some of the basics of the Trump tax plan, with an eye toward looking at how they would affect you.
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The key elements of the Trump tax plan
The most visible change to the tax laws under the Trump plan would be the streamlining of various tax brackets. Currently, taxpayers have to deal with multiple tax brackets that impose taxes of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% depending on income level. Instead, the Trump plan would replace that structure with a three-bracket system, as follows:
Data source: Trump tax reform plan.
The first thing that many of those looking at the Trump plan focus on is that the top ordinary income tax rate is lower than under the current tax system. That leads many to believe that the primary goal of the Trump tax plan is to benefit the wealthy. Indeed, some other provisions of the plan, including the elimination of the net income investment tax and the individual alternative minimum tax, would be beneficial largely to upper-income taxpayers.
Tax breaks for lower-income taxpayers
However, the Trump tax plan has provisions that are aimed at the lower end of the income spectrum, as well. The plan would boost the standard deduction to $15,000 for single filers and $30,000 for married filers, making it much higher for those who have always used it. At the same time, the higher figure makes it more likely that others who itemized for smaller amounts in the past will be able to simplify their tax filing process by using the standard deduction.
Various child care-related provisions would also target lower-income taxpayers. Spending rebates for child care expenses would be implemented through the use of the Earned Income Tax Credit. Incentives to establish what the plan calls a dependent care savings account would include 50% matches on parental contributions for eligible taxpayers.
Hitting the upper end
At the same time, the Trump tax plan justifies its lower rates on high-income individuals by taking away some of the tax breaks that the wealthiest taxpayers have typically used the most. Itemized deductions would be capped at $100,000 for single filers and $200,000 for married filers, limiting the use of write-offs for the wealthiest Americans. The plan also takes a hard-line approach on the controversial carried interest provision that hedge funds and private equity investors often use, raising the tax on carried interest to treat it like ordinary income rather than lower-rate capital gains.
Phase-outs would also limit the availability of some of the favorable tax provisions under the Trump plan. For instance, child care costs would be deductible for most taxpayers, but the child care deduction would disappear for single filers earning more than $250,000 and married filers with income above $500,000.
Looking beyond the income tax
Still, other provisions of the Trump tax plan would arguably have a greater impact on the wealthy. Eliminating the estate tax would save wealthy families up to 40% on their taxable estates when a family member dies, although there would be an offsetting impact in getting rid of provisions that give inheriting family members a stepped-up tax basis in property they receive.
In addition, some of the business tax provisions would treat corporate entities much better than the current law does. The Trump plan would cut the corporate tax rate from 35% to 15%, and it would eliminate the corporate version of the alternative minimum tax. Deemed repatriation of assets would bring in immediate tax revenue, but the proposed rate of 10% would be far lower than the current provision, which has led most businesses to avoid repatriating assets so far.
Overall, the Trump tax plan hopes to simplify the income tax process for most Americans while offering significant overall tax cuts. Its goal is to spur enough economic growth to offset the net cost of the plan. Whether that economic growth would in fact materialize is a subject of intense debate on which policymakers disagree vehemently. However, the Trump tax plan does a good job of balancing the desire for simplicity among ordinary Americans against the benefits of cutting taxes for higher-income taxpayers.
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