Donald Trump's path to the presidential nomination of the Republican Party has been anything but conventional. The same could be said of Trump's tax policy, which received a makeover earlier this week.
Last year, Trump unveiled a plan to simplify our current progressive income tax structure. Right now, there are seven ordinary income tax tiers, starting at 10% and rising up to 39.6% for high-income earners. The tax proposal Trump laid out in 2015 called for narrowing these brackets to just four, ranging from a low of 0% (for single filers earning less than $25,000 and married filers earning up to $50,000) to a peak of 25% (for individuals making more than $150,000 and couples earning more than $300,000).
Well, it's time to take what we thought we know about this plan and throw it out the window, because Trump unveiled a modified version of his broader tax plan on Monday, Aug. 8. His new plan includes one major shift, but one important aspect of Trump's original tax reform proposal remains unchanged.
Trump makes a "yuge" income tax bracket adjustment
The biggest difference between Trump's new tax plan and his old one is in the ordinary income tax tables. Whereas Trump's original plan laid out four ordinary income tax brackets (0%, 10%, 20%, and 25%), the new plan entails just three -- along with a promise that plenty of lower-income, working-class Americans still wouldn't owe any income taxes. Trump's new progressive tax brackets call for ordinary income tax brackets of 12%, 25%, and 33%. That's an 8% jump in the highest income bracket compared with his original plan, but it would still represent a 6.6% drop from the current high-end rate.
Why did Trump alter his income tax brackets the way he did? It's tough to say with any certainty, but three factors come to mind. First, there were components of Trump's tax plan released in 2015 that needed clarification or fine-tuning.
Perhaps more telling is the Tax Foundation's estimate that Trump's original tax cuts would have reduced the federal government's revenue by about $12 trillion over the next decade. Even when including the potential economic boost resulting from consumers' additional spending money, the Tax Foundation found that the federal government would miss out on $10.1 trillion in revenue over the next 10 years. Raising the upper-income tax brackets would eliminate some of this shortfall.
But the most likely reason may be that House Republicans presented a tax plan using the three-tier 12%/25%/33% brackets as their preferred plan in 2016. By working with the House, Trump can potentially align himself with members of his own party and draw stronger support in his run for the presidency.
What would Trump's tax plan mean if implemented? Presumably, most Americans would be able to keep a little extra income, which Trump believes will reignite our consumption-driven economy. However, there are two main concerns: 1) whether the rich would benefit disproportionately, saving a larger percentage of their income, and 2) whether the revised plan would do enough to curb the growth of the national debt. Rising national debt could have an adverse impact on the job market and cause high levels of inflation, which would hurt many working-class Americans.
This key component of Trump's tax plan remains unchanged
However, one aspect of Trump's original proposal that he has not budged on is corporate income tax rates.
The U.S. corporate income tax rate of 35% is among the highest in the world. Some economists say this high tax rate inhibits corporate investment in the U.S. Trump's fix includes reducing the peak corporate income tax rate to just 15%. Comparatively, the worldwide corporate income tax average in 2015 was 22.9%, according to the Tax Foundation, or 29.8% when weighted by GDP. Dropping the corporate income tax rate in the U.S. to 15% would allow U.S. companies to hang on to a lot of extra cash that "The Donald" believes would be used to create economic value via jobs, expansion, and mergers and acquisitions.
Additionally, Trump would allow U.S. corporations, which hold more than $2 trillion worth of profits in overseas markets, to repatriate those earnings at a special tax rate of just 10%. Bringing that cash back into the U.S. could be a big creator of jobs and internal reinvestment.
Of course, cutting corporate taxes could also severely lower revenue collection, thus ballooning our already-growing national debt. Further, loopholes built into the current Trump tax plan could allow some individuals to rearrange their finances in order to take advantage of pass-through taxes, which are individual income taxes paid on a company's earnings. This could allow some people to pay a peak tax rate of 15% when they should be subject to the higher ordinary income tax.
Other touted components of Trump's plan include the elimination of the estate tax and the ability to fully deduct average child care expenses. The estate tax exemption is already a whopping $5.45 million, so eliminating the "death tax" entirely would probably only help wealthy Americans. The ability to deduct child care expenses, however, could be a nice tax break that appeals to lower- and middle-income families.
Trump's tax plan would work to put more money in the pockets of Americans and American businesses. The big question that remains is whether that would translate into enough economic growth to offset the reduction in federal income tax revenue collected. With presidential debates upcoming, perhaps we'll know more in a matter of weeks.