Let’s face it; taxes aren’t exactly a topic of conversation that gets the hair standing on the back of our collective necks. I know this, you know this.
But taxes are central to Donald Trump’s agenda as president, and the proposals which he has made and begun to enact are ones that are aimed at benefitting the American middle and working classes. Some policies constitute only minor changes to the current tax system, but Trump’s broader ambition is a complete overhaul of the American tax code, eliminating some of the most glaring inefficiencies and bureaucratic illogic that contribute to making tax season so miserable.
The proposals certainly lack detail and specificity on just how and when these broad changes will be enacted. However, credit must be given to the president for taking on a long-broken and overcomplicated tax code which he surely has intimate knowledge of due to his 48 years as a globally-operating businessman.
The Trump tax proposals, most importantly, are presented in language that the average individual can understand, which in and of itself is a step in the right direction toward a simplified code which works to eliminate the advantages one can gain from hiring a fleet of high-priced accountants. Using conservative economic principles as a guide, the Trump proposals take a wide-ranging approach to leveling the playing field that is the American tax code for individuals and businesses alike.
The Broad Goals of the Trump Tax Reforms
On Wednesday, May 26th, the Trump White House officially released a one-page plan stating the goals of tax reform as it pertains to both individuals and businesses. Listed as the primary goals of the reform in a broad sense are:
1) to grow the economy, resulting in the creation of millions of jobs.
2) to simplify the “burdensome” federal tax code which currently spans 74,608 pages, 187 times longer than it was a century ago.
3) to provide tax relief for middle-class American families in particular.
4) to lower the corporate tax rate from its status as highest in the world, helping to incentivize business incorporation and operation inside America’s borders.
These are all admirable and worthwhile goals that are far overdue, but the devil is in the details. While all of these proposed changes are easy to identify, implementing them requires an intimate knowledge of the current code, specifically problem areas that must be amended or cut completely.
Individual Tax Reform Specifics
To understand just how muddled the American tax code has become, particularly for individuals who can’t afford to hire an accountant and are forced to navigate the code on their own, here is an excerpt from The Washington Examiner:
“Most of the growth in the tax code came in the past 30 years, growing from 26,300 pages in 1984 to nearly three times that length today.
This growth in the tax code has not come without consequences. ‘Over the decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to buy hybrid vehicles, turn corn into gasoline, purchase health insurance, buy a home, replace that home's windows, adopt children, put them in daycare, purchase school supplies, go to college, invest in historic buildings, spend more on research, and the list goes on.”’
These addendums to be considered when doing taxes are simply too much for the average person to learn, much less spend time calculating to avoid as much taxation as legally possible.
Many of Trump’s proposals regarding individual tax reform are aimed at eliminating these confusing and time-consuming objectives within the tax code.
The steps to reduce tax-related confusion include:
1) Reducing the current seven tax brackets to three: 10%, 25%, and 35%.
2) Doubling the standard deduction. This means that the amount of your income that is tax-free will be increased for individuals. The current standard deduction for single individuals- $6,300- would be doubled, meaning that a single person’s first $12,600 in income would be tax exempt. For married couples, the current $12,600 standard deduction would become $24,000, significant increases that will essentially mean single earners in the $12,600 range and married earners in the $24,000 income range would not pay income tax, essentially constituting a 0% tax bracket.
3) Providing tax relief for families with child and dependent care expenses. This is one of the broad goals that the Trump administration will have to figure out how to implement, especially with the goal in mind of not increasing the deficit.
4) “Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.” This is something we will believe when we see it, especially considering that this applies directly to Trump the businessman. Still, I am not as skeptical as many who believe Trump will use the power of the Executive to further benefit his business ventures. So for now, I will take this proposal at face value.
5) Protect the home ownership and charitable gift deductions. There are several deductions that incentivize charitable donations and home ownership, two pillars of the American dream that are undeniably positive. That the proposal specifically aims to maintain these deductions is noteworthy and speaks to the common-sense approach being applied to tax reform.
6) Repeal the Alternative Minimum Tax. Initially implemented to reduce wealthy taxpayers using an array of deductions to essentially avoid paying income tax at all, this is a particularly burdensome facet of the current tax code. It requires an alternative calculation of one’s income taxes, which is both time-consuming and redundant despite having some merit. Additionally, the lack of accounting for inflation has meant middle-class individuals are being subjected to this penalty which was initially aimed at the wealthy. It is archaic and exemplifies the type of burdensome features of the tax code which Trump aims to eliminate.
7) Repeal the death tax. The logic is simple here: you earned your money for your kids and whatever causes you choose to support, not the government. This tax goes against the tenets of capitalism and economic liberty.
8) Repeal the 3.8% Obamacare tax that hits small businesses and investment income. Yet another hidden cost of Obamacare being done away with.
Reforms for Businesses
When it comes to business taxation, Donald Trump’s qualifications shine through. Though he does not always communicate the issues as articulately as many would like, he knows what makes business tick, and that taxes play a huge role in how a nation’s economy will function.
He has been vocal about incentivizing businesses to return their production to America. He also has pledged to reduce the tax burdens on small business already operating in the States. We have already seen companies such as Carrier cease plans to move factories overseas because of tax incentives promised by the Trump administration. These moves are aimed at furthering the appeal of America as a home for corporate incorporation, manufacturing, and production:
1) Reduce the corporate tax rate to 15%. The current corporate tax rate of 35% in America is the highest in the world, and even before he began campaigning Donald Trump has lamented this figure as oppressive to businesses who want to remain in the United States. This rate cut would also extend to small businesses structured as partnerships and S corporations. The president has been vocal in stating that a drastic cut in this figure would result in American companies returning factories and other operations from overseas, and Forbes agrees, stating that the benefits of a reduced corporate tax rate could be even more wide-ranging:
“A growing body of academic work, including recent research by AEI economists Kevin Hassett and Aparna Mathur, suggests that the Trump's administration's plan to lower corporate rates can translate directly into higher pay for employees. Moreover, lower corporate rates could encourage more investment from firms in the real economy to boost productivity and economic growth. Corporate taxation is very distortionary compared to other forms of taxation, something which the Trump administration tax reform plan astutely recognizes.”
If any president has had the experience to understand the implications of corporate taxation on business decisions, it is Donald Trump.
2) “Territorial tax system to level the playing field for American companies.” We can expect that this will amount to a number of tariffs on imports as well as other tax breaks for companies who operate in America.
3) One-time tax on trillions of dollars held overseas. Business and individuals who have avoided taxation by holding funds overseas must be held accountable, according to this proposal.
4) Eliminate tax breaks for special interests. Can you say, ‘draining the swamp’?
Implications of these proposals
It is important to note that these are only proposed plans which are likely many months away from being finalized, much less implemented.
The administration has announced that throughout May they will be considering feedback from a variety of sources, furthering the idea that these reforms are aimed to benefit American citizens, particularly in the middle and working classes, with their feedback being a critical factor in decisions about how these reforms will be received.
The formal release of these proposals is a start in the right direction. Trump is proposing fundamental changes to the tax code that, for the most part, make complete sense. Everybody agrees that the American tax code has become inaccessible to the average American, and this in and of itself is cause for drastic change.
Taxes are something that are required to keep a nation up and running, but the injection of special interests and other political agendas into the tax code have resulted in an indecipherable system that is in dire need of simplification. At the core of Trump’s proposals is the aim that every American be able to understand how they are being taxed, and whether those means of taxation are fair and equitable.
Further, promoting economic mobility by increasing standard deductions and easing the tax burden on businesses are aimed at stimulating the economy the old-fashioned way.
Critics of the proposals note that it does not include specifics on how these tax cuts will be offset. Correctly, they point out that this plan would not appear to be revenue neutral as Trump initially promised. As of now, the plan is expected to increase the deficit by 2-7 trillion dollars in the next decade.
They are not wrong, but the plan is lacking in many specifics across the board. This is not the final version of Trump’s tax reforms, only a broad outline of what is to be achieved, to what end, and in some instances how it will be achieved.
Like the tax code, the specifics of how it will be implemented and how tax cuts will be offset through other budget cuts are complicated details that will be figured out with time. For now, it is comforting to know that the president has a vision when it comes to reducing taxes for Americans who need relief the most.