On September 27, 2017, the Trump Administration released its tax plan, called The Unified Tax Reform Framework.
While Trump’s tax plan will boost economic growth by giving families and businesses more money to spend, it will also add a lot of debt, which could slow our growth down the line. Our previous seven tax brackets will now be reduced to three. Below is a summary outlining the income tax rate changes.
|Current Income Tax Rate||Trump’s Tax Plan||Single||Married-Joint|
|10-15%||12%||0%||$0-$37,500||$0 – $75,000|
|25-28%||25%||15%||$37,500 – $112,500||$75,000 – $225,000|
|28-39.6%||35%||20%||$112,500 +||$225,000 +|
For the bottom income tier of citizens, the new tax rate will be 10%, down from 15%. The middle tier will now be taxed 25% instead of 28%, and the top will be 28%, down from 39.6%.
The Framework eliminates itemized deductions (except for those on mortgage interest and charitable contributions).
It also eliminates the deduction for state and local taxes.
Trump’s tax plan doubles the standard deduction for everyone but eliminates personal exemptions. The plan also eliminates the estate tax, the generation-skipping transfer tax, and the Alternative Minimum Tax. See below for what these taxes are about:
The Estate Tax – taxing the transfer of property at death.
The Generation-skipping Transfer Tax – an additional tax on a transfer of property that skips a generation.
The Alternative Minimum Tax – this tax operates alongside the regular income tax. It requires many taxpayers to calculate their liability twice—once under the rules for the regular income tax and once under the AMT rules—and then pay the higher amount.
The Framework increases the Child Tax Credit income level so that more middle-income families will be able to take advantage of the credit.
Originally, a marriage penalty existed where Child Tax Credit of up to $110,000 could be earned, instead of the full $150,000 two single parents could earn. This penalty has been eliminated. The Framework will also allow a $500 credit for non-child dependents.
A major change to see is that The Framework will lower the maximum corporate tax rate from 35 percent to 20 percent. The maximum tax rate for small businesses, including sole proprietorships, partnerships, and S corporations, will be 25 percent. A majority of these are real estate companies, hedge funds and private equity funds.
According to The Framework, U.S.-based manufacturers will be able to deduct their expenses for new plants and equipment which will encourage more investment.
C corporations will no longer be allowed to deduct interest expense, which makes it more expensive for financial firms to borrow money for lending and investing.
The Framework will maintain deductions for research and development and also for low-income housing.
Income generated by businesses from overseas will not be taxed. This system will give an incentive to corporations to bring money back into the United States and could potentially keep companies from moving their headquarters overseas. Unfortunately, these companies can not use their losses that were generated overseas to offset any of their U.S.-based income.
How It Affects You
According to The Tax Policy Center, the Framework could increase the national debt by another $7 trillion over the next decade, which could dampen economic growth in the long run since the larger a debt, the less value a dollar has. Another perspective though is that the economy will be boosted over the next two to three years because tax cuts always put more money into our pockets for spending. See the chart below which outlines potential growth through 2019:
|Year||Percent Growth||Revenue Growth|
According to The Tax Policy Center, The Framework will reduce GDP after 2024, since the interest on the debt will consume a large portion of the federal budget. This will take away from job-creation.
The Framework appears to help the wealthy more than the middle class because once all deductions and exemptions are calculated, the poorest fifth of the population receives a tax break of 0.2 percent. Currently, a third of taxpayers already have existing incomes that are below their deductions and personal exemptions. This means they won’t benefit at all from the FrameworkPlan.
Lastly, The Framework does not benefit parents of school-age children because parents will no longer be able to use a personal exemption for each child. This results in a tax increase for almost 10 million parents.
The Trump Administration does have a method for their madness – its called supply-side economics. According to this theory, the more tax cuts businesses have, the more jobs are created. This was applied during the Reagan Administration (which was highly successful seeing that the highest tax rate at that time was 70 percent).
At the same time, companies may not want to create more jobs unless they see a demand for their product. But if the poor and middle class do not get any tax breaks, that is less money they will be spending out of pocket. When the wealthy get a tax break, they use it to save or invest which does increase the stock market, but doesn’t change demand.
“How President Trump’s Tax Plan Would Affect You,” USA Today, February 27, 2017
“Republicans Are Reconsidering Full Repeal of State and Local Tax Deduction,” The New York Times, October 3, 2017
“Unified Framework for Fixing Our Broken Tax Code,” The White House, September 27, 2017
“What Awaits Wall Street in Trump Tax Plan,” The Wall Street Journal, September 28, 2017
“Trump’s Tax Plan Could Hike Taxes for Middle- and Low-income Families,” CNNMoney, September 26, 2016