When Donald Trump first rolled out his tax plan last October, it contained a major boon for the middle-class — a near quadrupling of the standard income-tax deduction, to $25,000 for individuals and $50,000 for couples filing jointly.
But when Trump updated his plan with an eye toward controlling its costs on Monday, he didn’t mention the standard deduction at all — calling into question just how much benefit his plan has for lower- and middle-class taxpayers.
In its original form, the Republican presidential nominee’s plan was set to exempt about 70 million lower-income Americans from paying any taxes at all — and offer cuts to middle-income taxpayers, who are most likely to use the standard deduction. When that provision didn’t make it into Trump’s speech on economic policy Monday, observers were left to wonder just how much his revamped proposals will benefit lower- and middle-income Americans.
One of the “big question marks” in Trump’s speech to the Detroit Economic Club was “what is he doing with the standard deduction,” said Kyle Pomerleau, director of federal projects at the conservative-leaning Tax Foundation in Washington. “That was one of the biggest pieces in his original plan. If he backs away from it, it will significantly reduce the benefits to the middle class.”
Zero Rate
The standard deduction allows taxpayers to reduce their taxable income without itemizing expenditures such as charitable donations or mortgage-interest payments. Because it’s used most frequently by earners at the lower end of the wage scale, a large increase helps low- and middle-income people save on their taxes.
“No one will gain more from these proposals than low-and-middle income Americans,” Trump said Monday of his tax plans. He added that “for many American workers, their tax rate will be zero.” But he provided no detail on his new plans for the standard deduction, and his original proposal has been removed from his campaign website.
“We haven’t settled on what it’s going to be,” economist Stephen Moore, who is advising the Trump campaign on tax policy, said after the speech. “It’s going to be big enough so that most people won’t have to itemize.”
Trimming Cost
Moore and economist Lawrence Kudlow have been working with the Trump campaign to try to lower the cost of his original tax proposal, which contained across-the-board rate cuts for individuals, a major cut in the corporate tax rate and a new business-income tax rate that would benefit both small businesses and billionaires. It’s estimated cost: $10 trillion over 10 years.
Trump’s new plan would provide more modest cuts in individual tax rates. It sets up three rates — 12 percent, 25 percent and 33 percent, which would replace the current seven rates, which top out at 39.6 percent. (He’d originally proposed lower rates of 10 percent, 20 percent and 25 percent.) Combined with policies that would roll back business regulation and stimulate growth in the domestic energy industry, Trump’s plans would create enough economic growth to cut the 10-year revenue cost to $2 trillion or less, Moore said.
Child-Care Deduction
One new provision in Trump’s plan — a proposal that parents be allowed “to fully deduct the average cost of child-care spending from their taxes” — may provide much more benefit to taxpayers in the upper-middle class. Details of the plan are sketchy so far, but workers whose incomes are so low that they owe no taxes might not be able to take advantage of the deduction, while those with higher incomes could.
“Trump has moved away from his original plan of benefits to the middle class,” said Martin Sullivan, the chief economist at Tax Analysts, a widely-read trade publication.
By enlisting the aid of Moore and Kudlow — both former advisers to President Ronald Reagan — Trump has increasingly embraced so-called supply-side economics, a standard of the the 1980s that holds that high tax rates discourage economic growth. The theory’s validity is hotly debated by economists.
Trump “has drunk the supply-side Kool-Aid,” said Sullivan.
Pass-Through Plan
While Trump’s revised plan does indeed provide a shallower rate cut for top earners — proposing to tax their income at 33 percent instead of 25 percent — the plan contains another provision that may soften the blow: a new business tax rate of just 15 percent.
That rate would apply to all business income, including income that individuals earn from partnerships, limited liability companies and other “pass-throughs.” A pass-through business entity pays no taxes itself, but sends earnings onto its individual members, who pay income taxes depending on their tax bracket — at rates as high as 39.6 percent. Under Trump’s plan, they’d pay just 15 percent.
More than two-thirds of all such pass-through income flows to the top 1 percent of tax filers, according to the Center for Budget and Policy Priorities. In a research note published after Trump’s speech Monday, the group said the Trump’s business-tax proposal might prompt wealthy taxpayers to “reclassify a greater share of their income as pass-through income in order to take advantage of this much lower rate.”
Meanwhile, under Trump’s revised proposal, middle-class earners who receive comparatively little pass-through income would face a rate as high as 25 percent.
Few Details
Trump provided no details regarding the income levels at which his new individual tax rates would apply. Those details are important because they signal the trigger point at which the new rates would hit the middle class. The Pew Research Center set the floor for middle-class annual income at $24,042 for an individual and $48,083 for a family of four in 2014.
Trump’s original plan applied his lowest tax rate to single filers making between $29,000 and $54,000 (and to married filers earning between $58,000 and $108,000). “The real thing is, when push comes to shove, will he cut taxes for people making 20 to 30k a year?” Sullivan said. “In his original plan, he said he would.” Now, it’s unclear.
Trump also on Monday reiterated his call to end the estate tax, which currently applies a 40 percent rate to any estate worth more than $5.45 million for an individual (or $10.9 million for a couple). Repealing the tax, which is paid by 2 out of every 1,000 people who die, would cut federal revenue by $320 billion to the federal deficit over 10 years, the Center for Budget and Policy Priorities said.
