Donald Trump has laid out two tax plans: The first, announced last September (the “authentic Trump version”), and the second, under pressure from the Republican Party, announced in Detroit last week.
Both share these major outcomes: They lose trillions of dollars, driving up the federal debt and potentially starving the federal government of resources it needs to fund basic programs; they make the rich far richer; and, by comparison, they offer bread crumbs, at best, for ordinary Americans, including the typical American worker.
Here’s why.
Tax Plan #1. According to both conservative and liberal think tanks, this would increase the federal debt — now about $20 trillion — by about $10 trillion over just 10 years; and that’s after taking into account any economic growth it might produce.
Increasing our federal debt by 50 percent is particularly curious because Trump has been outspoken about the dangers posed by potential higher interest rates on the cost of servicing our existing debt.
Moreover, after Congress funds defense, Social Security, Medicare, Medicaid and interest on the national debt, the Trump tax cuts would leave Congress with little to fund anything else other than through massive borrowing.
These tax cuts thus put in jeopardy not just the enormous infrastructure investment that Trump promises, but revenue for education, housing, the judicial system, drug testing, job training, national disaster relief, enforcement of securities, pollution and anti-trust laws, science research, and much more.
With tax cuts of this magnitude, and all of their implications, voters should want to know how much of the tax cuts are for them.
If you’re an average family, you would save about $2,750 per year. If you are a member of the top 1 percent, you would save about 100 times as much — about $275,000 per year. As if that were not troublesome enough, each member of the top 0.1 percent of all income earners would save an astonishing $1.3 million — and that’s per year.
Trump’s Tax Plan #2. This plan is replete with “details to follow,” but so far this is what we know: It’s a slightly tamer version of Tax Plan #1.
Like the first plan, however, it would lower the top tax rate on corporations from 35 percent to 15 percent and the top tax rate on all businesses that choose to be taxed like partnerships from 39.6 percent to 15 percent.
These changes alone would be bonanzas not just for the largest corporations and their stockholders. Think about “those hedge fund guys,” as Trump previously called them. “[T]they would be paying up,” he had promised, which meant that they would pay the top rate on earned income rather than the mere 23.8 percent — the top capital gains tax rate — they were paying on their millions of dollars of gains.
But “those guys” have become “his guys.” They too would see their top rate drop to 15 percent, as would the most successful lawyers, accountants and countless other business owners. On the other hand, if you’re an employee, you will pay ordinary income rates — that run as high as 35 percent under Plan #2 — on your wages.
Among the most grateful beneficiaries under Plans #1 and #2 would be the heirs of the rich.
Trump promises that “no family will have to pay the death tax. American workers have paid taxes their whole lives, and they should not be taxed again at death — it’s just plain wrong.”
He’s right, if typical American workers paid “the death tax.” But they don’t. That’s because the estate tax is in no sense “a tax on death.”
Why? Because only a tiny fraction of 1 percent of all estates are subject to the tax. Specifically, no American worker’s estate today would owe any estate tax if their estate is worth less than $5.45 million (double that to nearly $10 million for bequests by a husband and wife). And that’s after unlimited deductions for charitable contributions and bequests to a spouse.
Yes, eliminating the federal estate tax would save zero taxes for the American worker but could save hundreds of millions of dollars (or more) for the heirs of billionaires, perhaps those of Trump himself.
By contrast, any reduction of the income taxes of ordinary Americans would be minor, or zero — the latter because over 40 percent of American households already have too little income to owe any federal income tax.
This is highly relevant to another of Trump’s promises: that his plan “will help reduce the cost of childcare by allowing parents to fully deduct the average cost of childcare spending from their taxes.”
But if you don’t owe any income tax under the current law, a new deduction won’t save you any money. (Trump has scrambled in the last days to correct this oversight by saying that workers could deduct their child care costs from their Social Security taxes; but even this deduction would be trivial for lower wage workers.)
On the other hand, deductions are most valuable to parents whose income would be taxed at the highest marginal rate — 35 percent under Tax Plan #2. Assuming that average childcare costs run about $12,000, and a CEO has two young children, a deduction of $24,000 could save him or her $8,400 (35 percent of $24,000).
Moreover, adding this new lucrative deduction to the tax laws would make childcare more expensive because the government subsidy would increase the demand for childcare and because childcare providers would take the deduction into account in setting fees. Ordinary working parents would thereby become double losers: they would benefit little, if at all, from the deduction, and their childcare costs would go up.
Yes, voters beware: The federal income tax system always has created winners and losers. Trump’s proposals make it easier for you to know which group you would be in.
John O. Fox of Amherst is a tax attorney.