Who Benefits and Who Loses in Donald Trump's Tax Plan?

Donald Trump's reformed tax plan has raised a lot of eyebrows on both sides of the political spectrum.    Let’s look at some details and then examine two analyses of their impact on the federal budget and on individual tax payers.

Mr. Trump’s changes on the tax reduction side include:

1.) Reducing the top personal income tax rate from 39.6 percent to 25 percent, as well as reducing the number of tax brackets from 7 to 4.

2.) Reducing the federal corporate income tax rate from 35 to 15 percent. 

3.) Eliminating the 3.8 percent high-income surtax on unearned income.

4.) Eliminating the Alternative Minimum Tax which was designed to ensure that the wealthiest Americans pay at least a minimal amount of tax.

5.) Increasing the standard deduction to $25,000 for single filers and $50,000 for married couples which means that these individuals will pay no taxes.

6.) Eliminating the estate tax.

Here is a table showing his proposed individual income tax brackets:

His changes on the tax revenue side include:

1.)  Phasing out most itemized deductions and exemptions for high-income taxpayers more rapidly than under current law. Deductions for mortgage interest and charitable contributions would not be reduced. 

2.) Ending the special tax break for “carried interest”.

3.) Ending the deferral of income taxes on corporate income earned in other countries, and capping the deductibility of business interest expense. 

4.) A one-time “deemed repatriation” tax of 10 percent would be imposed on the more than $2.1 trillion in permanently reinvested offshore profits held by American multinationals.

Let's look at the impact of these changes according to Citizens for Tax Justice:

1.) The poorest 20 percent of Americans would see an average tax cut of $250.

2.) Middle income Americans would see an average tax cut of just over $2500.

3.) Americans who are in the top 1 percent of earners would see an average tax cut of over $184,000.

As you can see, CTJ has calculated that, under the Trump plan, 34 percent of the tax cuts would go to the highest-earning "one percent" while the lowest-earning 20 percent of Americans would see only 1 percent of the benefits from the proposed cuts.  Here is a table showing the tax cuts and share of the cuts for each quintile of earners if the Trump tax plan was implemented in the 2016 tax year:

In total, CTJ estimates that the Trump tax plan would cut federal revenue from personal income taxes by $10.8 trillion over the next ten years.

Now, let's look at how the Tax Foundation calculates the impact of Donald Trump's tax plan.  Here is a table showing the ten-year tax revenue impact of the Trump Tax Reform Plan:

On a static basis (i.e. assuming no impact of tax cuts on economic growth), federal tax revenue would drop by $11.98 trillion over a ten-year period with $10.2 trillion of the loss being due to the reduction in personal income taxes.  As well, corporate income taxes would be reduced by $1.541 trillion.  If the economic growth that results from lowered taxes is included, the negative impact on revenue would be only $10.14 trillion.  

Obviously, the Tax Foundation feels that the Trump tax cuts will have a significant positive impact on the economy.  Here is a table showing the impact of the Trump tax plan on economic growth, capital investment, wages and job creation:

The Tax Foundation feels that a larger economy would result from the significant reduction in the service price of capital for corporations.  As well, the reduction of marginal tax rates on individual income would increase the incentive to work, resulting in the creation of 5.3 million new full-time equivalent jobs.

Here is a table showing how Trump's tax plan would impact after-tax income for all 10 income groups when compared to the current tax laws:

As you can see, on a static basis, the most significant benefits fall to the highest earners which would see their after-tax incomes rise by 21.6 percent.  This compares to a range of 0.6 percent to 1.4 percent for the lowest 30 percent of earners.

In closing, let's put the $10.8 trillion and $11.98 trillion numbers into perspective.  Here is a table  from the fiscal 2016 federal budget showing government receipts and outlays from 2014 and 2015 along with the proposed federal budget for 2016 and the projections for 2017 to 2025:

With fiscal 2016 outlays budgeted at $3.999 trillion, the revenue cuts from the Trump tax plan would cover between 2.7 and 3.0 years of outlays assuming that the Trump tax plan is not revenue neutral.  

While Trump's plan is interesting, tax analysts suggest that it is far from revenue neutral and that the proposed tax cuts will not be offset by the proposed increases in revenue.  As well, according to an analysis by the Tax Policy Center, 67.3 million or 41.4 percent of all tax filers paid no income tax in 2014, making it difficult to see how much of an impact Trump's tax plan would really have on the lowest earners in America.  What is quite obvious, however, is that the highest earners in the nation will benefit the most from the proposed changes, an observation that should really surprise no one.