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During the campaign, Donald Trump put out reasonably comprehensive proposals for changes in individual income tax that he promised to take to Congress next year. Here's a list of what's likely to be included.
Tax Benefits for Families
Trump originally proposed to eliminate income taxes for 70% of Americans by exempting the first $25,000 of income, twice that for married couples. That promise is no longer on his website, though adopting it would make the economy more efficient and restore the original premise of the income tax, described when it was permanently adopted in 1913 (that the tax would apply only to “surplus” income – defined, back then, as money beyond what is needed to pay for necessities). It would also reduce, for a significant majority of Americans, the burden of filling out tax returns or paying to have them prepared.
Instead Trump now proposes a tax hike for poor and many middle-class parents, though his website does not call it that. Here's how: He would replace the current $1,000-per-household childcare tax credit with an unlimited deduction for childcare.
A tax credit of $1,000 is worth the same to everyone with children in the care of others. But a tax deduction has no value for most taxpayers because they do not itemize. And it is worth only 10 cents on the dollar for those in the bottom tax bracket, but 39.6 cents per dollar of income for those in the top bracket.
Trump’s plan also favors large families over small. He has five children, four of whom are grown.
The credit for childcare for children under age 12 is not adjusted for the number of children, a de facto Congressional policy against large families. (As the father of eight grown children I tend to notice these sorts of subtle government policies that economically favor small families.)
Trump would switch to a deduction that provides larger benefits to larger families, but would be of no value for the roughly 70% of taxpayers who do not itemize deductions. Switching from a tax credit to a tax deduction would mean that the vast majority of working parents would face a tax increase, at least as his plan is currently sketched out.
Under the Trump plan a couple rich enough to employ, say, five nannies can deduct all the costs of those nannies, presumably including the costs of first-class airfare as the nannies shuttle the tykes from mansion to mansion.
Tax Bracket Changes
One of the economically sillier issues in politicians' tax plans is changing the number of tax brackets as income rises. In a progressive tax system – an idea invented nearly 2,500 years ago by the ancient Athenians when they created democracy – the greater one’s gains, the higher the tax rate. The moral theory of this policy is that it is society that makes economic gains possible – through protecting wealth from thieves and invading armies. Those who have more assets protected should contribute more to that protection.
Multiple tax rates add almost nothing to complexity, as Robert E. Hall, the eminent economist who co-authored "The Flat Tax," once told me. Hall said he regretted that the book called for a single rate rather than a progressive rate structure.
Rates are also inherently misleading because of the complex interactions Congress has created among credits, deductions and definitions of taxable income. Some years ago a study showed that the highest marginal tax rate in America was more than 90% and it was paid not by the rich, but by a couple age 62 through 65 who had started collecting Social Security benefits but earned enough income that Congress clawed back a hunk of their retirement benefits. Of course, unless the couple did a detailed analysis of their income taxes they would never know that, so subtle are the interactions.
Trump’s latest tax proposal embraced the House Republican plan to reduce the number of tax brackets to four: 0%, 12%, 25% and 33%. Trump says he would limit deductions for high-income taxpayers except for charitable gifts and mortgage interest.
The Mortgage Interest Deduction
Trump would keep the mortgage interest deduction as it is – which means a housing subsidy for the affluent and the rich. The subsidy benefited only one in five taxpayers in 2014. The 16% of households making more than $100,000 deducted 58% of all mortgage interest. Among homeowners, fewer than half qualify for the deduction – because they make too little money, their interest payments are too small or they do not itemize deductions.
This subsidy also inflates the prices of homes as people pay higher prices to capture the tax benefit. As with many subsidies the net effect is a loss for homebuyers because if the deduction were eliminated, lowering housing prices would also lower interest paid.
The reality is that Congress, not presidents, sets tax rules and rates. But with Republicans in control of both houses of Congress as well as the White House, there is a good chance that these changes in personal income taxes – and any other proposals from the new administration – could pass and be signed into law with less delay than in many years.
Would they represent significant change? In my view, Trump's proposals up to now (and Clinton's quite different plans, for that matter – see Clinton vs. Trump: What Happens to Your Income Taxes?) just tinker around the edges, rather than create real reform of a system that has become so complex, burdensome and capricious in how it treats taxpayers with the same income that no politicians defend the system as it exists. Then again, no one seems willing to actually reform it, either – because too many in the political donor class have an interest in preserving this or that provision.
Pulitzer Prize winner and recipient of an IRE medal and the George Polk Award, David Cay Johnston is author of five books. His new book, "The Making of Donald Trump," was published on August 2, 2016. His next one will be "The Prosperity Tax: A New Federal Tax Code for the 21st Century Economy." Johnston is a Distinguished Visiting Lecturer at Syracuse University College of Law and Whitman School of Management, and also writes for The Daily Beast and Tax Notes.