The Presidential campaign of Republican nominee Donald Trump was marred by infighting earlier today, with 2016 Trump ripping the tax proposal set forth by 2015 Trump, alleging that the plan favored the rich, unfairly benefitted big business, and recklessly added trillions to the deficit.
“Sad,” 2016 Trump added.
OK, fine…that didn’t happen, but would it really surprise you if it had? And more importantly, it certainly could have happened, given how dramatically Trump revamped his previous tax proposals earlier today. Let’s take a look at some of the new aspects of the plan, and how they compare to those set forth by 2015 Trump.
Republican presidential candidate Donald Trump gives a speech on September 28, 2015 in New York City announcing his first tax plan, with a now gone 0% rate at teh bottom. (Photo by Andrew Burton/Getty Images)
Tax Rates
2015 Trump:
| Ordinary Income | Capital Gains | Single Filers | Married Filers |
| 0% | 0% | $0 to $25,000 | $0 to $50,000 |
| 10% | 0% | $25,000 to $50,000 | $50,000 to $100,000 |
| 20% | 15% | $50,000 to $150,000 | $100,000 to $300,000 |
| 25% | 20% | $150,000 and up | $300,000 and up |
2016 Trump:
| Ordinary Income | Capital Gains | Single Filers | Married Filers |
| 12% | 12% | $0 to $37,500 | $0 to $75,000 |
| 25% | 20% | $37,500 to $112,500 | $75,000 to $225,000 |
| 33% | 20% | $112,500 and up | $225,000 and up |
Reason for Change:
The current top rate on ordinary income is 39.6%. Tack on the 3.8% Obamacare tax on certain “net investment income” — interest, rental income, passive business income, etc… — and the phase out of itemized deductions for high-income taxpayers, and the top rate rises to 44.6%. When Trump announced in 2015 his plan to reduce the current seven-bracket system to four while dropping the top rate from 44.6% to 25%, economists immediately pegged the move as a boon for the rich. In fact, the Tax Policy Center determined that while Trump’s tax cuts would save a middle-class taxpayer in the neighborhood of $2,700, the richest 1% of taxpayers would experience an average tax cut of $275,000. Clearly, these wealthiest individuals benefitted far more from the 20% reduction in their top rate than they were harmed by any revenue raisers in the original Trump plan.
As a result, Trump announced that he would revise his tax rates to mirror those previously set forth by Republican think tanks, with a top rate of 33% that — when compared to the previously pitched maximum rate of 25% — greatly reduces the benefit experienced by those currently paying tax at 44.6%.
You might also notice a change on the other end of the income spectrum: what was once a 0% rate for low-income taxpayers is now 12%. When he originally issued his tax plan, Trump loudly trumpeted his 0% bracket, stating, “If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households — over 50% — from the income tax rolls.”
2016 Trump softened the blow of the increased bottom rate by explaining that his increased standard deduction — described below — would more than offset the loss of the 0% bracket. As we’ll see next, however, those standard deductions have also been dramatically cut by 2016 Trump, bringing millions of Americans back onto the tax rolls.
Standard Deductions/Personal Exemptions
2015 Trump:
Increased the standard deduction to $25,000 for single filers and $50,000 for joint filers, indexed for inflation. Left personal exemptions at $4,000 per person, also indexed for inflation.
2016 Trump:
Increased the standard deduction to $15,000 for single filers and $30,000 for joint filers, indexed for inflation. All personal exemptions are eliminated.
Reasons for Change:
Who knows? As discussed above, one of the biggest talking points of 2015 Trump’s plan was the elimination of tax obligations for some 75 million Americans. 2016 Trump has drastically cut that number by replacing the 0% tax bracket with a 12% bracket while simultaneously dropping the standard deduction and eliminating personal exemptions. As we will discuss below, this may have been part of Trump’s overall plan to make his proposal more revenue-neutral, but until his proposals are formally scored, it’s hard to imagine how much revenue would be raised by increasing taxes on the poorest 25% of taxpayers.
Tax on Small Businesses
2015 Trump:
2015 Trump and 2016 Trump see eye-to-eye on one thing: they both want to reduce the corporate tax rate from 35% to 15%.
2015 Trump, however (OK, it was really mid-2016 Trump, but all these changes get hard to keep track of) wanted to ensure that all business income was taxed at 15%. As a result, his previous tax plan stated that if an individual ran a business as a partnership or an S corporation — in these entities, income is not taxed at the business level, but rather at the owner level — the individual would pay tax on the business income at a top rate of 15%, even if his or her individual tax rate landed in the 25% or 33% bracket.
This is a radical departure from current law, where the business income earned by an individual through an S corporation or partnership is taxed at the individual’s tax rate, whatever that may be. Thus, business income can be taxed at a rate as high as 44.6% under current law; as you can imagine, the thought of a 30% drop in tax rate had partners and shareholders salivating.
Perhaps more notably, 2015 Trump would extend the top 15% rate on business income to individuals who were self-employed; had this change come to fruition, every employee in America subject to Trump’s 25% or 33% bracket would have gone to their boss and asked to be treated as an independent contractor, immediately dropping their tax burden to 15%.
2016 Trump:
In his revised plan released today, 2016 Trump takes direct opposition with 2015 Trump, scrapping the huge tax cuts previously promised to S corporation and partnership owners and self-employed individuals. Instead, as is the case under current law, these individuals will pay tax on their business income at their individual rates, which will rise as high as 33%.
Reason for Change:
OK, there’s no reason to avoid the elephant in the room any longer. As you’ve noticed, all of the changes discussed so far share a common theme: in each instance, 2016 Trump is raising taxes compared to 2015 Trump. The reason for these increases is obvious: when 2015 Trump’s plan was released, the Tax Foundation determined that his proposed cuts would reduce federal tax revenue by $12 trillion over the next ten years. If you’re not aware of how our government works, it is tax revenue that allows us to build bridges and colonize Saturn and imprison various Real Housewives. If we suddenly lose $12 trillion over a decade, that amount increases our deficit. And if we insist on continuing to spend that $12 trillion (hint: we will), we’ll need to continue to borrow it from China at 78% annual interest.
Based on the changes to his proposals, it is clear that Trump’s advisors lend credence to the Tax Foundation’s report, and recognize that his original proposals were in no way grounded in economic reality. As a result, some large revenue raisers were required, and 2016 Trump will take back a significant chunk of the tax cuts promised by 2015 Trump in an number of ways, the first being the change to the business tax rate.
Limitation on Itemized Deductions
2015 Trump:
In his initial proposal, 2015 Trump defied Republican convention by seeking to raise taxes on the wealthy. One way he would do so was by limiting the value of certain itemized deductions. While no formal details were provided, it was assumed he would cap the benefit of itemized deductions at a specific tax rate — say, the 28% that Hillary Clinton has promised — while allowing mortgage interest and charitable contributions to be deducted in full.
2016 Trump:
Today, 2016 Trump clarified — and perhaps tightened — the proposal of 2015 Trump. He stated that all itemized deductions would be capped at $200,000 for married taxpayers and $100,000 for single taxpayers. Today’s announcement was silent as to whether mortgage interest and charitable contributions would be subject to the limitation, but based on a literal reading of the press release, they would.
Reason for Change:
This is, as we say in the industry, a “targeted tax increase.” Very few taxpayers will ever approach six figures worth of itemized deductions, so the motivation behind these thresholds is clear: to generate additional revenue from the wealthiest 1% while leaving lower and middle-class taxpayers unaffected. This will make his overall plan more progressive, and will further cement Trump’s position as a political outsider, as Republicans are generally loathe to increase taxes in any way, shape or form.
Estate Tax
2015 Trump:
Under current law, a taxpayer who dies with an estate valued at more than $5.45 million will pay tax on the excess value of 40%. 2015 Trump, like any other Republican candidate, would eliminate the estate tax. “No family will have to pay the death tax. American workers have paid taxes their whole lives. It’s just plain wrong and most people agree with that. We will repeal it,” said 2015 Trump.
2016 Trump:
Here’s where things get interesting. 2016 Trump would still repeal the 40% tax assessed on the value of a decedent’s estate. As opposed to his previous plan, however, 2016 Trump would tax the appreciation inherent in the estate’s assets — or what we call “capital gains” at a 20% rate upon death. He would provide a $10 million exemption, meaning only the wealthiest taxpayers in America would be subject to the tax.
This proposal represents the largest derivation from Republican ideology, where any type of tax upon the passing of an estate from decedent to heirs is staunchly opposed.
Reason for Change:
The reasons are likely identical to those discussed above for the changes in the itemized deduction limitation: by taxing appreciation upon death, 2016 Trump claws back some lost tax revenue, while also positioning himself as the rare Republican willing to increase taxes on the country’s wealthiest taxpayers.
Immediate Expensing of Capital Acquisitions
2015 Trump:
2015 Trump — OK, again, this was mid-2016 Trump — was offering the moon and stars, promising that businesses would be permitted a full, immediate deduction for the cost of purchased assets while also being permitted to deduct — subject to limitation — its interest expense on borrowing.
2016 Trump:
Today’s proposal continues the promise of immediate asset expensing, but only for “manufacturers.” How that term is defined has vexed the current tax law, and would surely continue to do so given the incentive to meet the definition in the hopes of huge write-offs.
There’s also a catch: a manufacturer must elect to immediately expense the cost of acquired assets, and if it does so, it must forego any deduction for interest expense on its borrowings.
Reason for Change:
One of the biggest criticisms of the original Trump plan was that it simply offered too much; allowing corporations to both immediately deduct asset costs and borrowing costs would simply strip too much tax revenue from the government coffers. 2016 Trump’s changes to his proposals more closely matches the moves favored by economists, who tout the economic impact of immediate expensing while applauding any incentive for corporations to reduce their reliance on borrowing.
Summary
Clearly, we’ve poked some fun at Trump for the radical redesign of his tax proposal. But truth be told, these changes are nearly all steps in the right direction, save for perhaps his one-two punch of raising the bottom rate from 0% to 12% while cutting back the standard deduction. According to Trump, these changes will reduce the cost of his plan from $12 trillion over 10 years to $4.4 trillion, and while neither the Tax Foundation nor the Tax Policy Center have weighed in on these claims as of yet, the increases outlined above will clearly result in a significant reduction in lost tax dollars. Perhaps more importantly, by targeting most of his changes at the wealthiest 2% of taxpayers, Trump’s plan becomes more progressive, while also providing powerful talking points throughout the upcoming deba
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