President Donald Trump offered a glimpse into his approach to tax reform, but it contained few details. Here's what we know from the document:
Bigger cut for middle class
The three new income tax rates would be 10 percent, 25 percent and 35 percent. But Trump's top economic adviser, Gary Cohn, and Treasury Secretary Steven Mnuchin, weren't ready to say at what income levels these new rates would kick in. According to the new document, households would be able to avoid taxes on their first $25,200 in income for a married couple (the figure for individual taxpayers would be half that), but on top of that, there could be additional exemptions depending on the size of the household.
Trump wants to eliminate all individual tax deductions except for those that relate to mortgage interest and charitable giving. Those are two of the most popular provisions. However, these could become unnecessary to most taxpayers because of the much higher standard deduction.
A bigger tax cut for the rich
The plan would reduce the top rate on individual income tax — now 39.6 percent for income over $472,000 for a married couple — to 35 percent. Trump would repeal the estate tax, which is levied on the inheritances of the wealthy. The richest 10 percent of taxpayers are projected to pay 90 percent of estate taxes this year, said the nonpartisan Tax Policy Center.
Trump would also repeal a 3.8 percent fee that applies to investment income over $250,000 for a couple as part of President Barack Obama's health care reforms, essentially cutting the top federal capital gains rate to 20 percent.
Most economists believe that reducing the rate on corporate income to 15 percent would mainly benefit those who own stock in those corporations, who tend to be richer. The Tax Policy Center forecast that 51 percent of the benefits from that plan would eventually accrue to the wealthiest 1 percent of taxpayers.
The plan would eliminate the alternative minimum tax, which makes it harder for very rich individuals to game the system and pay less tax. But it can be an aggravating tax for the well-to-do. (It cost Trump an additional $31 million in federal income taxes in 2005.)
A boon for businesses
The plan would also slash the corporate rate from 35 percent to 15 percent, a boon to most companies. With tax credits and other loopholes, most corporations pay closer to 20 percent, JPMorgan said.
Aside from most large companies, many partnerships and small businesses would benefit because they're structured as pass-throughs, which derives from the fact that they pass on their profits to their owners. Those owners now pay individual income tax rates, which top out at 39.6 percent. With the pass-through rate dropped to 15 percent, those taxpayers could enjoy an enormous tax cut.
The Trump team stressed the benefits that might flow to small businesses. But lawyers, hedge fund managers, consultants and other big earners might be able to pay that 15 percent rate on their earnings instead of an individual income rate. People who already receive their income through investment vehicles wouldn't have to change anything for a windfall.
Nearly 75 percent of pass-through income flows to the 10 percent wealthiest taxpayers, said the liberal Center on Budget and Policy Priorities.
What about deficit, growth?
The government's budget deficit could explode under the plan, economists said. The Committee for a Responsible Federal Budget's rough estimate puts the loss of revenue at $5.5 trillion over 10 years.
Mnuchin argued that the tax cuts would spur faster growth, which, in turn, would produce more tax revenue. And the elimination of tax deductions and other loopholes would raise revenue as well, he said. But most economists don't accept the notion that growth would accelerate enough to offset the lost revenue. Alan Cole, an economist at the right-leaning Tax Foundation, calculates that the corporate tax cuts alone would reduce government revenue by $2 trillion over 10 years.
Other economists said that if the cuts balloon the deficit, the resulting jump in government borrowing would swell interest rates and make it harder for businesses and households to borrow and spend. Ethan Harris, chief global economist at Bank of America Merrill Lynch, said that such a "crowding out" effect can cancel out any benefits to the economy.
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