On September 27, President Trump unveiled his tax plan, as developed by his administration, the House Ways and Means Committee, and the Senate Finance Committee. The White House hails the plan as “a unified framework to achieve pro-American, fiscally responsible tax reform.” President Trump has laid out four main objectives for this plan:
- Make the tax code simple, fair, and easy to understand
- Give American workers a pay raise by allowing them to keep more of their hard-earned paychecks
- Make America the jobs magnet of the world by leveling the playing field for American businesses and workers
- Bring back trillions of dollars that are currently kept offshore to reinvest in the American economy
Let’s take a look at each of these objectives and how the new proposal seeks to achieve them.
Number 1 and 2: A Simpler Tax Code and More Money in the Pockets of Workers → INCOME TAX CUT
First of all, the Trump tax plan doubles the current standard deduction to $24,000 for a married couple and $12,000 for a single filer. According to the Treasury Department, this “effectively create a larger ‘zero tax bracket’ by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.”
Additionally, “the framework eliminates many itemized deductions… but retains tax incentives for home mortgage interest and charitable contributions, as well as tax incentives for work, higher education, and retirement security.”
In another effort to simplify the tax code, the plan proposes repealing the Alternative Minimum Tax.
In order to allow workers to keep more of their money, the plan proposes reducing the current 7 tax brackets to 3 brackets of 12%, 25%, and 35%. This actually raises the lowest current bracket of 10%. However, the framework states that the change will be offset “due to the larger standard deduction, larger child tax credit and additional tax relief that will be included during the committee process.” The plan also leaves open the possibility for a fourth tax bracket that “may apply to the highest-income taxpayers.”
Numbers 3 and 4: Making American Businesses More Competitive and Bringing Home Trillions of Dollars → CORPORATE TAX REFORM
According to the Tax Foundation and NPR, the United States has the highest corporate tax rate among advanced economies, however many companies “end up paying far less than the statutory rate” of 35% due to several loopholes and deductions (often added to the tax code due to special interest groups). Also if you look at federal, state and local taxes combined, it totals “nearly 39 percent… well above most other OECD nations.” The Trump plan aims to cut the federal corporate tax rate to 20%.
In order to bring home trillions of dollars stashed overseas by businesses seeking to avoid taxes in the US, the framework seeks to switch to a territorial tax system. Under the current system, an American company that earns profits overseas has to pay taxes in both the overseas country and the United States if it wishes to bring that money back home. Switching to a territorial system would mean that an American business earning money overseas would only pay taxes in the jurisdiction in which it was earned. If that business was then to bring their overseas profits back to the United States, that money would not be taxed.
Why It’s Complicated
While America’s wealthiest few will receive the largest tax cuts, the Tax Policy Center projects that “taxpayers in the 80th to 95th income percentiles would, on average, experience a tax increase.” It is also expected to “reduce federal revenue by $2.4 trillion over ten years and $3.2 trillion” over twenty years. The Trump proposal may lower the tax burden for some, but it also includes an elimination of the state and local tax deduction. Trump has recently stated that he is open to negotiations regarding this widely-used deduction.
Our corporate tax code is broken. Republicans and Democrats alike know this. We need to lower the corporate tax rate and make the switch to a territorial based system in order to encourage businesses to reinvest in America. However, a broad tax cut (as outlined in the Trump plan) fails to eliminate several loopholes that effectively lower the tax rate by more than 15% for many companies. What we need is to lower the tax rate and eliminate unnecessary loopholes intended to benefit special interest groups.
The last time comprehensive tax reform happened (under President Reagan), legislators took over two years to debate and sort out all the fine details of the plan. Now, the Republican leadership hopes to push this bill through Congress by the end of the year. Most Americans agree that our tax code needs to be fixed, and it’s going to take time, effort, and bipartisanship on part of lawmakers to get it done right.