Trump's tax plan seen as boon for rich, unclear for middle class

US President Donald Trump gestures as he arrives at Palm Beach International Airport in West Palm Beach, Florida, for the Good Friday holiday and Easter weekend April 13, 2017. — Reuters pic
US President Donald Trump gestures as he arrives at Palm Beach International Airport in West Palm Beach, Florida, for the Good Friday holiday and Easter weekend April 13, 2017. — Reuters pic

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WASHINGTON, May 1 ― President Donald Trump’s economic advisers pitched his new tax plan as a cut for the middle class and not the wealthy, but the opposite may be true. Tax policy experts say its current provisions would undoubtedly mean lower taxes for top earners, while the impact on middle incomes is less clear.

Trump’s blueprint ― a list of bullet points released on April 26 ― would directly reduce taxes for upper earners by cutting the top income-tax rate to 35 per cent from 39.6 per cent; eliminate the Alternative Minimum Tax, which raises the tax bills of certain taxpayers on the higher side of the income scale; and scrap a 3.8 per cent investment income tax under Obamacare that applies to individuals with incomes of more than US$200,000 (RM868,200). The plan would also repeal the estate tax, which would save an estimated US$200 billion over a decade for individuals with estates worth more than US$5.45 million.

So-called pass-through businesses also would pay the same 15 per cent tax rate that Trump has proposed for corporations, which would financially benefit not only mom-and-pop shops but also big partnerships like law firms and business empires like his own.

“We can confirm that outline shows plenty of benefits to high-income earners,” said Alan Cole, an economist with the conservative-leaning Tax Foundation. “And for the middle class? Honestly, we don’t know.”

Trump’s own taxes

As the name suggests, pass-through businesses pass their income through to their owners, who pay taxes at their individual rates. For high-income owners, that rate is currently 39.6 per cent, and reducing it to 15 per cent would be a major tax cut.

In an interview with Fox News the aired on April 28, Trump brushed aside concerns about the pass-through cut. He focused on his call to cut the top individual rate to 35 per cent and to eliminate most deductions.

“If I’m individually paying 35 per cent, I will tell you that’s more,” he said during the interview. “I’m going to end up paying more than I pay right now.” He added: “The reason I will pay more is because I’m going to lose all the deductions.”

The one-page blueprint proposes, without specifics, to “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.” It calls for protecting the popular and costly deductions for mortgage interest and charitable giving.

Cole estimated that eliminating every itemized deduction would raise about US$2.2 trillion over a decade, which he said is less money than would be lost because of lower tax revenues. “So you’re at a larger net cut for the wealthy,” he said.

William Gale, a senior fellow on taxes and fiscal policy at the nonpartisan Brookings Institution, also said that even if all available deductions were eliminated, “I don’t see how the plan could avoid being an enormous tax cut for high-income households.”

Carried interest

One group might see higher taxes: Investment managers stand to lose the carried-interest tax break, which allows for them to pay lower tax rates on their earnings than average workers, Reince Priebus, Trump’s chief of staff, said Sunday on ABC’s “This Week” program.

Trump’s one-page tax-plan outline didn’t mention the break, but “the president wants to get rid of carried interest,” Priebus said.

Cole said the pass-through business tax cut to 15 per cent would go “almost exclusively to the wealthy.” Leonard Burman of the Tax Policy Centre called it “a giant, juicy loophole for high-income people.”

Burman said “there’s no way” that Trump’s plan won’t lower taxes for top earners, despite the rhetoric from his administration.

“This isn’t about a dramatic cut in taxes for the wealthy,” Treasury Secretary Steven Mnuchin said on NBC’s Today show on April 27, one day after unveiling the plan with White House economic adviser Gary Cohn. “This is about a middle-income tax cut.”

‘Bigger cuts’

Gale, who co-authored a study on 2012 Republican presidential nominee Mitt Romney’s tax plan, said it called for fewer tax cuts than Trump’s blueprint. Nonetheless, Romney’s plan “could not avoid being a tax cut for the top 1 per cent, even if all income-tax expenditures were closed,” Gale said. He said Trump’s plan has “significantly bigger cuts at the top,” making it mathematically impossible not to be a tax cut for high incomes.

The impact of Trump’s bullet points on the middle class is “really hard to tell,” Burman said.

Trump’s tax outline doesn’t specify the income thresholds attached to the three proposed individual rates of 10 per cent, 25 per cent and 35 per cent, Burman said. The child-care and dependent tax break that the plan advocates to help the middle class also is unspecified.

Trump’s call to double the standard deduction, which is typically used by low- and middle-income earners who don’t itemise their deductions, would directly “benefit some lower- and moderate-income people,” Burman said.

Middle-income earners

Still, some middle-income earners may pay higher taxes under the plan, Burman said, with a repeal of the state and local tax deduction. The provision, which traces back to the inception of the federal income tax in 1913, primarily benefits Americans in high-tax states such as New York, New Jersey and California.

Cole argued that Trump’s proposed corporate tax cut to 15 per cent would indirectly benefit middle-class Americans, including workers whose pension funds would benefit and shareholders who’d see investment gains as a result of the lower rate.

Appearing April 27 on ABC’s Good Morning America, Mnuchin said the administration’s “objective” is that no middle-class earners pay more. But he stopped short of promising that none would, saying, “I can’t make any guarantees until this thing is done and on the president’s desk.”

Directly counter’

Lily Batchelder, a law and public-policy professor at New York University and former tax counsel to Senate Finance Committee Democrats, said Trump’s proposal “runs directly counter to Mnuchin’s statement that their number one objective is making sure that no one in the middle class pays more.”

Republicans defended Trump’s plan.

Representative Kevin Brady of Texas, the chairman of the tax-writing House Ways and Means Committee, said there’s “a lot” in the outline for the middle class: “Much stronger growth for jobs. Much stronger wages for Americans. Lower tax rates at every level.”

Representative Trent Franks of Arizona said Trump’s tax cuts would benefit Americans of all incomes.

“It means a significant resurgence of the economy, significant growth, a tide that lifts all boats,” he said. “This is good for the middle class, for the upper class, as it were, and for, especially, the poorest in our society.”

In a letter today to Mnuchin and White House budget director Mick Mulvaney, which was led by Senator Chuck Schumer of New York, Democrats said they are concerned that unfunded tax cuts would threaten federal programs that especially benefit the middle class.

“We write to express our concern that your new deficit-exploding proposal to hand out massive tax breaks to millionaires and billionaires will threaten deep cuts to Social Security, Medicare, Medicaid and other middle-class priorities,” the 11 Senate Democrats wrote, citing a rough estimate by the nonpartisan Committee For a Responsible Federal Budget that the Trump outline could cost US$5.5 trillion in revenues over a decade. ― Bloomberg

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