Most Americans, regardless of their preferred political party, agree that federal taxes are too high, and that the current federal tax system is too complex. With Republicans controlling the White House and both houses of Congress, the likelihood of meaningful tax reform has not been as great for three decades.1 So, what can we expect?
Many tax reform promises that Candidate Trump made during the last presidential campaign did not align with the prevailing Republican Party platform, much less with congressional Democrats whose support for tax reform would be needed. Ultimately, Candidate Trump’s plan evolved, and President Trump’s plan is now much closer to his party’s.
Seven Brackets Reduced to Two
While not fully-formed, the most recent Trump plan proposes to reduce the seven personal tax brackets into three:
- 12% marginal tax rate for taxable income up to $37,500 for an unmarried individual or $75,000 for a married couple;
- 25% marginal tax rate for taxable income between $37,500 and $112,500 for an unmarried individual or between $75,000 and $225,00 for a married couple; and
- 33% marginal tax rate for taxable income greater than $112,500 for an unmarried individual or $225,000 for a married couple.
Of note, the taxable income thresholds for married couples are exactly 2x those for unmarried individuals, so this proposal would eliminate the “marriage penalty” that has imposed higher taxes on spouses who both earn incomes than on otherwise identical single people with the same incomes.
Larger Standard Deductions
Of course, taxable income depends upon allowable deductions, and the Trump plan proposes to more than double the current standard deduction amounts; from $6,350 to $15,000 for unmarried individuals, and from $12,700 to $30,000 for married couples. The plan further proposes to increase child care expense deductions, and add additional child care tax benefits for those in the lower tax brackets.
Estate Tax & Federal Tax
Lastly, the Trump plan proposes to repeal the estate tax that has existed, in various forms, for over 100 years. It is estimated that 99.9% of estates do not pay estate tax, but estate tax revenue was still $8.5 billion dollars in 2012, and is expected to be $225 billion over the next ten years.2
The most recent Republican Party tax reform platform3 also proposes to cut federal taxes and simplify the federal tax system by, among other things, reducing the personal tax brackets to the same three as in Trump’s plan, repealing the estate tax, and repealing the alternative minimum tax.4
The platform also proposes to increase standard deductions – from $6,350 to $12,000 for unmarried individuals, $18,000 for unmarried individuals with a child or children, and from $12,700 to $24,000 for married couples – as well as provide a deduction for ½ of realized capital gains and eliminate itemized deductions other than mortgage interest and charitable contributions.
Cuts vs Revenue
As you can see, the President and the Republican Party share many proposals, as well as the overall goals of federal tax cuts and simplification; however, federal tax cuts reduce federal revenue. Recent studies indicate that the President’s tax cuts could result in a $442 billion reduction in federal tax revenue, begging the question whether Congress could implement federal budget cuts to avoid an increase of the already-bloated national debt. Ironically, in a recent survey of 1,800 registered voters conducted by the University of Maryland’s Program for Public Consultation, in which the participants could make simulated tax policy changes, a majority made changes that increased federal tax revenue by an average of $112 billion per year. Even Republican respondents made changes that would raise federal tax revenue by $36 billion per year, and the majority made changes that would increase personal taxes for the wealthiest taxpayers and retain the estate tax.5
On the other hand, congressional Republicans may be eager enough for a “win” following the recent healthcare reform setback to overlook objections that would be strongly-held under other circumstances, and the apparent majority opinion.
1Meaningful tax reform last occurred in 1986, when Congress implemented the second of the “Reagan tax cuts” to simplify the tax code and eliminate many tax shelters.
4A higher income tax required of certain individuals, corporations, estates, and trusts whose exemptions or special circumstances would otherwise allow for a lower tax.