Predicting the priorities of the Donald Trump administration is a favorite game in Washington and even around the world these days including his proposal in revising current tax law.
Donald Trump has proposed tax reforms that would significantly reduce marginal tax rates for both individuals and businesses, increase standard deduction amounts to nearly four times current levels, limit or repeal some tax expenditures, repeal the individual and corporate alternative minimum taxes and the estate and gift taxes, and tax the profits of foreign subsidiaries of US companies in the year they are earned.
The proposal would cut taxes at every income level, but high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income.
Here are four charts that explain the Trump’s plan, and how the tax code could likely affect U.S. Citizen starting next year:
Sources: Tax Policy Center
Below are the major element that will be a Trumph’s tax plan :
- Individual Tax Rates
- Tax dividends and capital gains at a maximum rate of 20 percent.
- Limit the tax value of itemized deductions (other than charitable contributions and mortgage interest) and exclusions for employer
-provided health insurance and tax
- Increase the phaseout rates for the personal exemption phaseout and the limit on itemized deductions.
- Repeal the alternative minimum tax.
- Tax carried interest as ordinary business income.
- Repeal the exclusion for investment income on life insurance contracts entered into after 2016.
- Estate and Gift Taxes
- Repeal federal estate and gift taxes.
- Business Taxes
- Reduce the corporate tax rate to 15 percent.
- Limit the top individual income tax rate on pass-through businesses such as partnerships to no more than 15 percent.
- Repeal most tax breaks for businesses.
- Repeal the corporate alternative minimum tax.
- Impose up to a 10 percent deemed repatriation tax on the accumulated profits of foreign subsidiaries of US companies on the effective date of the proposal, payable over 10 years.
- Tax future profits of foreign subsidiaries of US companies each year as the profits are earned.
- Affordable Care Act Taxes
- Repeal the 3.8 percent net investment income tax on high-income taxpayers (single filers with income over $200,000 and couples with income over $250,000, unindexed).
So what is impact?
1. IMPACT ON REVENUE
The Trump plan would reduce federal receipts by $6.2 trillion between 2016 and 2026 before accounting for macroeconomic feedback effects. About three-fourths of the revenue loss would come from business tax provisions. Corporations would pay less tax than they do now because their top rate would be reduced to 15 percent and the corporate AMT would be repealed. Pass-through businesses taxed under the individual income tax would pay less because they could elect a flat 15 percent rate. All businesses could elect to expense investment, a benefit which would partially be offset by the loss of interest deductions (for businesses that elected expensing), repeal of some tax expenditures, and, for multinational corporations, the tax on unrepatriated foreign income.
The remainder of the revenue loss would result primarily from net cuts in non-business individual income taxes. Reductions in income tax rates, repeal of the net investment income tax, and repeal of the individual AMT would all lose revenue. The increase in standard deduction amounts and the new child and dependent care provisions would also lose revenue, but these losses would be more than offset by the repeal of personal exemptions and head of household filing status, and the cap on itemized deductions.
2. IMPACT ON COMPLEXITY
Mr. Trump’s revised tax plan would simplify the tax code in several ways, but it would also create some new complexities. By significantly increasing the standard deduction and repealing personal exemptions, the plan would reduce record-keeping and reporting requirements. The number of itemizers would drop 60 percent to 27 million in 2017. Eliminating the head of household filing status, the complex AMT, and the ACA’s 3.8 percent rate on net investment income would also simplify tax preparation. For some businesses, the proposal to elect expensing and the elimination of certain tax expenditures would simplify record keeping and tax preparation.
3. IMPACT ON AGREGATE DEMAND
The revised Trump plan would increase aggregate demand, and therefore output, in two main ways. First, by reducing average tax rates for most households, the plan would increase after-tax incomes. Households would spend some of that additional income, increasing demand. This effect would be attenuated to some degree because most tax reductions would accrue to high-income households, which would increase spending proportionately less than lower-income households in response to an increase in after-tax income. Second, the provision allowing businesses to elect to expense investment would create an incentive for businesses to raise investment spending, further increasing demand. These effects on aggregate demand would raise output relative to its potential level for several years, until actions by the Federal Reserve and equilibrating forces in the economy returned output to its long-run potential level.
Those increases in output would boost incomes, which in turn would raise tax revenue, offsetting some of the plan’s revenue losses. TPC estimates that the plan’s effects on demand would, in themselves, boost revenues by $53.1 billion in 2017 (or between $12.1 and $116.0 billion billion using TPCs full range of estimates), by $34.9 billion (or between $8.0 and $76.2 billion) in 2018, and by smaller amounts in later years. The revenue effect of the revised Trump plan, taking into account the dynamic revenue gains based on the TPC Keynesian model using standard parameters, are shown above in table 2.
4. IMPACT ON SAVING AND INVESTMENT
The revised Trump plan would alter incentives to save and invest in the US. Large reductions in the tax rate on corporate and pass-through business income, lower effective marginal tax rates on long-term capital gains and qualified dividends for most taxpayers with such income, and lower rates on interest income throughout the income distribution would all increase the after-tax return to savers.
Rosenberg, Joe, Rohally Jeff, Page Ben, Burman Len, Nunns Jimm. 2016. An Analysis of Donald Trump’s Revised Tax Plan. Tax Policy Center Urban Institute & Brooking