Donald Trump released his much-anticipated tax plan. The proposal will cut the corporate tax rate from 35% to 15%. This looks great from the outside, especially to the American people of which Donald Trump promised wide-ranging reform. Corporate tax rates of 15% are great, but how will the deficit look after this proposal? When peeling back the onion of taxes, the real story is discovered. Cutting this much funding to the government and not increasing a deficit is unlikely. Roughly, each percentage point cut in the tax rate lowers revenue by $100 billion over a decade. The 20-point decrease would mean $20 trillion lost over a decade. In order to get a tax cut, something else would need to be cut, like social entitlements or government spending.
The proposal would cut tax brackets from 7 to 3. Brackets would consist of 35%, 25%, and 10%. This proposal would eliminate the estate tax, the alternative minimum tax, and the 3.8% investment income from the Affordable Care Act. Estate taxes only apply to individuals with assets greater than $5.49 million. Those individuals will pay a tax of 40%. This year there will only be about 5,200 individuals who file for this tax or .2% of all deaths. Alternative minimum taxes would affect nearly 5 million people. “After calculating their regular income tax, many middle- and upper-income taxpayers must add a number of AMT “preference items” to their taxable income, subtract an AMT exemption amount, and recalculate their tax using the AMT tax rate structure. AMT liability is the excess, if any, of this amount over the amount of tax owed under the regular income tax rules. The AMT has two tax rates: the first $187,800 of income above the exemption is taxed at a 26-percent rate, and income above that amount is taxed at 28 percent(TaxPolicy).”
In order to get this bill passed, he would have to get this through the Democrats, which seems unlikely. The Democrats’ base voter’s gross income is $75,000 or less, which happens to be the biggest group affected. In this tax bracket, 110 million didn’t pay any material federal tax. Additionally, 50 million paid zero taxes in 2014. Also, 33 million in this group paid less than $25 a week. These households accounted for 74% of all tax filers, which accounts for $175 billion, or 13% of the grand total. The average household among the bracket would save $1 per day if taxes were cut to 15%. In the higher brackets, the top 4% of incomes greater than $200,000 paid $102 billion, or 5 times more than the bottom 74%. There were 6.2 million filers in this group, who collectively paid 58% of all taxes. The average filer paid $129,000 in taxes in 2014. The top 16% of all wage earners (24 million) paid 80% of $1.38 trillion, or $1.1 trillion of income tax. As you can see, cutting the tax rates by that much will leave the government with no funds to operate, especially in a rising interest rate environment. Congress can barely agree on a stop-gap measure to keep the government funded for another 7 days.