Craig Donofrio — Break It Down
President Donald Trump’s tax plan is once again in the legislative spotlight. To hear the administration tell it, the nine-page proposal unveiled late last month will Make America Great Again via an overhaul that would cut taxes for the working class and usher in a new era of higher wages for all. Last week, President Trump said the reform would lead to an average $4,000 “raise” for American families.
But—surprise!—this White House claim does not have fact-checkers on its side. The plan includes hefty tax cuts for corporations and the ultra-rich and a sweeping restructure of tax brackets, which haven’t been proved to explicitly benefit the lower and middle classes. On the contrary, these moves could result in higher taxes for some middle- and low-income families, a bigger deficit, and pressure to cut government spending on programs that do benefit the working poor.
The proposed overhaul features another Trump-era signature: It’s huge.
“These are by far, since the 1980s, the biggest tax changes [the government has] proposed,” says Andrew Poulos, founder of Poulos Accounting and Consulting, Inc., located in Atlanta. “I don’t think they have a shot in hell right now.”
But with a GOP-controlled federal government chomping at the bit to score a tax reform win by the end of the year, here’s what’s on the agenda.
Big cuts for corporations
Currently, corporations are taxed at 35 percent. Under Trump’s plan, that drops to 20 percent, a cut the president recently described as “rocket fuel for our economy” during a speech before the National Association of Manufacturers in Washington, D.C. The general idea behind that claim is that higher taxes strangle economic growth, leaving businesses with less money to hire and innovate.
But tax breaks and various loopholes already keep corporate taxes well below that official 35 percent rate. In 2012, 40 percent of large corporations—those worth at least $10 million—paid no federal income tax. For those profitable corporations that did pay tax, the average rate was 14 percent between 2008 and 2012 according to a 2016 analysis by the Government Accountability Office.
The proposal also calls for ending taxes on foreign, or offshore, profits. But big businesses already use offshore accounting tricks to defer paying taxes at home. The Institute on Taxation and Economic Policy, a bipartisan economic think tank in Washington, D.C., sums this up nicely:
“We know that American corporations engage in these accounting gimmicks because the profits they report to the IRS as having been earned in low-tax countries are impossible. For example, American corporations reported that their subsidiaries in the Cayman Islands earned a total of $46 billion in 2012, but this is impossible because that tiny country’s entire economic output that year was only $3 billion.”
The plan would put a max 25 percent tax on S-corporations and sole-proprieties (aka pass-through businesses), which are currently taxed at their owner’s income level. While wealthier business owners already paying more than 25 percent may be delighted by the proposed cap, the plan doesn’t specify any lower tax brackets for pass-through businesses, putting owners who currently pay less than 25 percent on edge that the max may actually be a flat rate.
The little deduction that couldn’t
Unless the federal budget is massively slashed, all that money big business isn’t forking over to the IRS will have to be found elsewhere—and that could raise taxes for some people.
“They need to offset those revenue losses to the Treasury somehow. Effectively, that [corporate tax] reduction is a huge deficit,” says Poulos. “The thinking is, they can change things around a bit, eliminate some deductions, eliminate some credits, and offset the revenue loss.”
The plan calls for the elimination of nearly all itemized deductions, like those which offset state and local taxes. Instead, the standard deduction—currently $6,350 for single filers and $12,700 for joint filers would nearly double to $12,000 for singles and $24,000 for joint filers.
Some itemized deductions—like mortgage interest and charitable giving—will remain, but because of the size of the standard deduction, they’ll only benefit taxpayers with huge mortgages or hefty charitable contributions—in other words, the very wealthy. “They become worthless deductions for millions of Americans,” says Poulos.
Having a bigger standard deduction doesn’t automatically create a win for taxpayers, who currently have the option of crunching the numbers and deciding whether taking a standard deduction or itemizing will result in the lowest federal tax bill.
According to ITEP, 42 percent of taxpayers in the higher middle class—those making between $111,000 and $241,000 annually—would see an immediate tax hike if essentially their only option is the increased standard deduction. The institute also found that at least a fifth of all taxpayers across nine states and Washington, D.C., will get a bigger tax bill, mostly thanks to eliminating the deduction for state and local taxes.
Other tax increases could occur gradually. Given what is currently known about this plan, by 2027, roughly 30 percent of people with incomes between $50,000 and $150,000, and 60 percent of those with incomes between $150,000 and $300,000, would pay more in taxes, according to an analysis by the Urban-Brookings Tax Policy Center.
Tax cuts for some, miniature American flags for others
For people who don’t see a tax increase under this proposal, their economy-stimulating gain will be worth everyone else’s pain, right? Not exactly. For all but the wealthiest households, the tax cut will be modest. According to ITEP, the average tax cut for the nation’s richest families is 4.3 percent, whereas middle class families will see an average tax cut of just 0.8 percent. The Tax Policy Center estimated this would result in after-tax income gains just under 2 percent for almost everyone, with that modest number declining further by 2027.
Also, the plan eliminates the estate tax, which only affects those inheriting fortunes worth at least $5.5 million ($11 million per married couple). The Alternative Minimum Tax, a tax law that’s in place to ensure the wealthy pay some tax no matter how many loopholes and breaks they use, is also on the chopping block. The estimated tax revenue impact of repealing the AMT is $37.1 billion; the estate tax repeal would cost $25.2 billion.
The proposal would also cut the seven current tax brackets to three. It’s not entirely clear yet what the income breakdowns are for those proposed brackets, but there is already worry that it could hurt the middle class. “My concern is, in the plan for three brackets, they’re going to eliminate the 15 percent tax bracket, which is something like 70 percent of middle-class households,” says Poulos.
Taxpayers will be moved accordingly into either a higher or lower bracket, and those paying the higher rates will have the cold-comfort of knowing that they’re helping to finance those huge tax cuts for corporations and the uber-wealthy.
“I personally think small business owners and the middle class will foot the bill in its entirety in its current form,” says Poulos. Plus, those tax increases on families and individuals, meant to make up the revenue loss caused by the hefty cuts for corporations and the rich, “won’t come close to balancing out,” he says.
Will it pass?
This bill still has to get through Congress, and since it requires such sweeping changes, it’s likely that the final tax plan will look quite different than the current proposal. While progress was made earlier this week to approve the federal budget, a necessary step toward debating tax reform in Congress, lawmakers on both sides have expressed doubt. Fiscal conservative hardliners are displeased about the potential to balloon the deficit by $1.5 trillion to $2 trillion. House Minority Leader Nancy Pelosi said the framework was “giving away the store to the wealthiest while sticking the middle class with the bill.” Even the National Association of Realtors denounced Trump’s tax plan, saying it could remove the incentive to buy a home, hurting the real estate industry.
Then there’s public opinion: According to a CNN poll released Wednesday, more than 50 percent of Americans oppose this tax plan, with about a third believing their families would be worse off under reforms.
“If they get any tax reform done,” says Poulos, “it’s going to have to be significantly different to get it passed.”