Donald Trump’s Economic and Tax Policy – Part 1
With August coming to a close, and the battle for the U.S. Presidency about to come full steam, I thought it fitting to review each candidate’s economic policy. This is a personal finance blog after all, and what is more key to personal finances than taxes and jobs? This is the format that the review will take: first, I will describe the policy and then I will explain the impact and what I believe are going to be the positives and negatives of the policy. That said, I’m going to try to find the negatives of each policy – for both candidates. Politicians have become quite adept at putting lipstick on a pig. Furthermore, we are all about to become inundated with why a candidate’s plan is awesome; by understanding the negatives of a policy, you should at least have an idea of what questions to be asking about each candidate. I will attempt to stay as objective as possible by using economic theory as a backdrop for my critiques. Due to the enormous amount of material that will be covered I have decided to play the article out in two different posts – one the pertains to just tax policy, and the other that encompasses economic and trade policy. I think the separation of the two should allow for an easier read, while also still giving proper due diligence to each topic.
As the political underdog and rambunctious cowboy candidate, I decided that Donald Trump should be the first candidate reviewed. He’s provided soundbite after soundbite for the nightly news to replay; however, not usually for his economic proposals. The facts that I have collected have come from three places: his website, politifact.com, and the Tax Policy Center report on Trump’s tax plan. While those create the crux of where my notes come from, I have also done some side research to validate claims that I felt were skeptical.
So without further ado, let’s welcome to the stage, Mr. Donald Trump’s tax policy!
The Donald Trump Tax Reform for Individuals
In our current system we have what’s considered a progressive income tax system. The more you make, the more you pay. This is accomplished through rising marginal tax rates under seven different brackets – with rates from 10% to 39.6%. Under Trump’s proposal, he intends to cut the brackets down to three with rates at 10%, 20%, and 25% for top earners. He intends to increase the standard deduction from $6,300 up to $25,000 for a single filer, while keeping the personal exemption at $4,000. For those top earners (single filers over $200,000 and married couples over $250,000) he intends to repeal the 3.8% surtax on investment income that was instituted via the Affordable Care Act. Other than the 3.8% surtax removal, taxes on investment income will stay the same. One final note, Trump’s platform says that child care expenses will be an above the line deduction (that means deducted from your gross earnings) and capped at the average expenses for your state of residence. The details on the child care exclusion are limited to none, so that’s really all I can say at this point.
To summarize his tax reform: your bill will go down. I honestly don’t see any circumstance where you might pay more. This is because the brackets are broader and rates lower – not to mention the $18,000 increase in the standard deduction. As more of an aside, Mr. Trump also favors repealing the estate tax, AKA the Death Tax.
The inclusion of a larger standard deduction should reduce the headache in filing your taxes. The idea is that many people will benefit more from the standard deduction over itemized exemptions and thus not itemize. Trump has noted that deductions, like mortgage interest and charitable donations, would still be applicable under the standard deduction. An important note to consider is that with the marginal rates decreasing, the cost of charitable contributions will increase. Our current system allows a dollar for dollar deduction in your adjusted gross income. Thus, the “cost” for someone in the 39.6% bracket to donate a dollar is only 60.4cents. Under the new proposal, the cost for someone to donate would be 75cents, because the top marginal rate is 25%.
The Donald Trump Tax Reform for Business
Trump has essentially argued for a flat fifteen percent tax on business income while also repealing the alternative minimum tax; he also seeks to include pass-through income as business income. Trump’s plan also seeks to tax carried interest as ordinary business income. One final thing that is critically important about Donald Trump’s business tax plan is how he plans to deal with multi-national corporations. He intends to impose up to a 10% tax on accumulated profits of foreign subsidiaries of US Companies. This repatriation tax would be payable over the term of 10 years. However, all future profits from the time the law passes would be taxed as regular corporate income. For example, let’s use Google Europe. It’s owned by Google, an American company; however, it’s an entirely foreign company. The revenues – which are exclusive to sales only from Europe – never touch American soil, and are taxed by its foreign host country. Trump is advocating to tax those profits a second time as if they were earned in the United States.
The alternative minimum tax is a tax for those entities that receive multiple exemptions or deductions that end up paying few taxes. It was designed to ensure that companies (and there is also one for an individual) would still pay some tax even if they were able to legally minimize their taxable income. The Tax Policy Center estimates this at $90billion in revenue for 2016-2026. As for carried interest, it’s currently taxed as long-term capital gains (20%, unless you include the 3.8% surtax from the ACA, then it is 23.8%). By moving it to ordinary business income, they would receive a 5-8.8% deduction.
Problem’s with Donald Trump’s Business Tax Reform
I made a special section for issues with the business taxes because it’s a little nuanced. The personal income tax changes are fairly straightforward – bigger exemptions, fewer brackets, and lower rates.
So to talk about the nuances let’s start with the change of pass-through income to be taxed as business income rather than ordinary income. Pass-through income is income earned by a business that is then “passed on” to the partners to be taxed as regular income. This avoids the double-taxation that C-type corporations face, as well as allowing the partners to enjoy more of the money because less is taxed. Trump’s individual 20% tax rate starts at income over $54,000. That means anyone who makes more than that has an incentive to try and get classified as an independent contractor to take advantage of the lower marginal rates. In fact, this has happened before. In 2012, Kansas eliminated the state income tax on pass-through entities. Then, as predicted, the number of pass-through entities drastically increased in the following years. This transformation in the business environment could, but not necessarily, increase the wages for workers because companies would no longer be supplying fringe benefits such as healthcare or IRA’s (my personal opinion based on business history is that the wages will not increase to make up for the loss of fringe benefits). This could be solved via Trump’s healthcare plan (which would be briefly discussed tomorrow) and the opening of a SEP-IRA. Be sure to check out my discussion of IRA’s.
This change in status would likely necessitate the promulgation of new laws to deal with independent contractors. Just Google “UBER lawsuits” to see the issues facing current independent contractors. Such laws would be onerous and likely to face contentious disputes. Not to mention such laws would be difficult to enforce as it restricts the freedom to choose how you engage in the labor force. As it stands though, our current laws are likely insufficient to deal with such a drastic change.
Another important issue is the idea of taxing foreign revenues of U.S. companies. It poses a very serious question for people: are we okay with taxing a company’s earnings even if they have no affiliation (other than proprietary software) with the United States? Such a tax is protectionist and is likely to stir up negative feelings for other countries, and ultimately it conflicts with Donald Trump’s other statements of trying to enforce free market principles. On top of that, the incremental income that is created overseas will face triple taxation – once by the U.S. government, second by the foreign country hosting the company, and third as capital gains when paid out as dividends. That’s a lot of hands in the cookie jar all grabbing the same cookie.
The Donald’s tax reform leaves a lot of detail out and isn’t actually finished yet, which is troublesome considering elections are in a few months. That said, his proposals leave a lot to be enjoyed by both sides of the aisle as individual taxes will decrease which should appease Democrats worried about the low income families; conversely, his business taxes are likely to be enjoyed by Republicans as it reduces government revenues. The revenue haircut is yuuuuuuuge and is estimates at $9.5trillion over 10 years. That number becomes significant tomorrow as I talk about his economic and social policies. His wish to cut revenues seems at odds with his expanding existing social policies or creation of new ones. Stay tuned, part two is upcoming!
What do you think about Donald Trump’s tax policy? Do you think it could be successful? Be sure to let me know in the comments below. Also go ahead and check out the Cash Flow Celt Facebook page, and ‘like it’ so you get all the newest content when it comes out.
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