Analysis of Donald Trump’s Individual Tax Plan

Analysis of Donald Trump’s Individual Tax Plan

Yikai Zheng

ABSTRACT

This paper introduces and analysis presidential candidate Donald Trump’s individual tax proposal. His plan would significantly increase standard deduction amounts and reduce marginal tax rates on individuals. Individual will save tax expenditures. His plan would reduce taxes across-the-board, especially for working and middle-income Americans who will receive a massive tax reduction. The plan would improve incentives to work, save, and invest. On the other hand, it is estimated by the Tax Policy Center that the plan would reduce federal revenues by $6.2 trillion over 10 years, or by $3.6 trillion after accounting for the additional economic growth it would generate. It would increase national debt unless the government accomplish large spending cuts. In this paper, I will introduce the main idea of Donald Trump’s individual tax plan first, then analyze its advantages and disadvantages from both micro and macro perspective, finally put forward some concerns and draw a conclusion.

ONE. Description of Changes

1. Change of tax rates

The plan would reduce the number of individual income tax brackets from the current seven brackets to three, with rates of 10, 25, and 33 percent. The top rate would fall from 39.6% to 33%. Low-income Americans will have an effective income tax rate of 0. The Trump Plan will retain the existing capital gains rate structure (maximum rate of 20 percent) with tax brackets shown above. Carried interest will be taxed as ordinary income. The 3.8 percent Obamacare tax on investment income will be repealed, as will the alternative minimum tax.

1. Deductions

Trump plan to increase standard deduction. The trade-off is that personal exemptions will be eliminated. Also, the favorable head-of-household filing status will no longer be available.

1. Death tax and Child Subsidies

Trump would repeal the estate tax. Instead his plan would tax capital gains at death His exemption would be very large which is $10 million.

The childcare exclusion would be provided to families who use stay-at-home parents or grandparents as well as those who use paid caregivers, and would be limited to 4 children per taxpayer. The eldercare exclusion would be capped at $5,000 per year. The Trump Plan would offer spending rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65 percent of remaining eligible childcare expenses. All taxpayers would be able to establish Dependent Care Savings Accounts (DCSAs) for the benefit of specific individuals, including unborn children. Total annual contributions to a DCSA are limited to $2,000 per year from all sources.

TWO. Advantages and Disadvantages

Advantages

1. Substitution effect and Income effect

The substitution effect of income tax cut is that lower tax rates increase incentives to work, save, and invest, which will boost economic growth. The proposal would cut effective tax rates on labor income (i.e., wages and salaries for employees and self-employment income for others). Research suggests that taxes play a small role on labor supply decisions for most workers. When tax rates fall, some workers choose to work more because the reward for working rises, but some choose to work less because of income effect. It is easier to meet consumption goals with higher take-home pay. But for lower-earning spouses who are sensitive to taxes, they will increase the incentive for entering the workforce, which may increase the labor supply. Both the tax cuts of corporations and individuals will help Trump to create more jobs to reach his vision of creating a dynamic booming economy that will create 25 million new jobs over the next decade.

1. Tax base broadening

By controlling discretionary tax expenditures, the role of taxation in determining the allocation of resources across the economy will be reduced. The economic output will increase at the same time. It is part of Trump’s pro-growth tax plan. We should also consider that base broadening may increase effective marginal tax rates by raising the cost of some goods and services purchased with the earnings.

1. Less complexity

Trump’s plan would make tax code less complex in several ways. By reducing the number of individual income tax brackets from the current seven brackets to three, individual will spend less time doing their tax calculation and tax planning. Also, by increasing the standard deduction and eliminating some tax expenditures, the plan would reduce record-keeping and reporting requirements and reduce the number of itemizers. Eliminating the complex AMT and the Affordable Care Act surcharge on net investment income would also simplify tax preparation.

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