As the presidential campaign heats up, candidates are sharing their plans for changing the tax code. Since Donald Trump has made himself a viable contender — indeed, the Republican front-runner at this time — it’s worth taking a moment to examine his plan.
First, Trump says he wants to “simplify” the tax code. I think every candidate in my lifetime has called for that. And once upon a time. the tax code was indeed simple. You can thank Congress for the way it is today. Despite what politicians say, I don’t see the tax code being simplified in my lifetime.
But assuming Trump were elected, and Congress passed his plan, here’s how it would work:
“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,” his plan says. “That removes nearly 75 million households — over 50% — from the income tax rolls.” Trump says these people will get a new one-page form to file with the IRS that says, “I win” — whatever that means.
What the plan doesn’t mention is whether the earned income tax credit would go away. This is a credit for low-income working people. Currently, if you are age 25-64 and your income is below a certain amount, you can receive this credit — and the amount of the credit is increased substantially if you have a qualifying child or children. With this credit, some people can get a refund that exceeds their entire income tax liability. Most low-income workers rely on this refund, so taking this tax credit away would certainly be a significant change to the tax code.
The plan calls for only four tax brackets: 0%, 10%, 20% and 25%. The current brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. As you can see, the highest tax bracket in Trump’s plan is only 25%, considerably lower than today’s top rates. The proposal also eliminates the so-called marriage penalty, which is a quirk of the code that reduces certain tax benefits for married taxpayers compared to what two single people would get.
Trump’s plan also calls for the elimination of the alternative minimum tax (AMT), an alternate calculation of a taxpayer’s income tax liability. The AMT was originally put in place in 1969 to prevent wealthy individuals from eliminating most or all of their tax liability through certain tax deductions. However, the AMT has never been adjusted for inflation, so as a consequence, more and more middle class individuals end up paying this tax. I’d like to see the AMT go away, if for no other reason than it would make it much easier for my clients to do their tax planning.
Trump’s plan addresses corporate taxes as well, calling for an across-the-board 15% rate. Currently, the corporate income tax has a tiered system. If a firm has taxable income of less than $50,000, it pays 15%. (Unlike individuals, corporations are taxed only on their profit — what’s left over after expenses.) The tax bracket for the highest-earning corporations is 35%, which is the highest in the world. Because corporate taxes are so high, many American companies have gone through corporate inversions. A corporate inversion is when a U.S. company merges with a company based overseas — in a country with a more favorable corporate tax structure country — and moves its headquarters out of the U.S. to take advantage of lower taxes.
Trump says his plan is “revenue neutral,” which means it would not add anything to the federal budget deficit. But the only way that could happen is if the plan came with spending cuts.
Whether Trump’s tax plan could work is difficult to say. Whether Trump will win the nomination, let alone the general election, is impossible to say. And even if Trump does win, there’s no way to know how the plan would have to change to get it through Congress. But one thing is for sure: Every candidate has a tax plan, so changes may well be on the horizon. Love him or hate him, you should understand Trump’s tax plan.
This article also appears on Nasdaq.