Donald Trump's Income Tax Brackets: How Much Would You Owe?

This is a big year for America, as we'll be electing a new president for the first time in eight years. Whoever winds up ascending to the Oval Office will not only have the task of working with Congress to pass important legislation regarding the economy, jobs, immigration, and national defense, just to name a few hot-button topics, but the policies he or she seeks to implement could very well wind up impacting your wallet.

Donald Trump's tax plan
One candidate that you could say has made quite the splash this election season is real estate mogul and businessman Donald Trump, whose popularity seems to derive from the fact that he's not a lifelong politician and thus would be seeking to do what's right for America and its people if elected president.

But could Trump really ensure that growth in the United States gets on track and stays there? The answer to this question probably depends on how successful hus tax reform plan would be with regard to generating tax revenue and spurring economic growth.

Not familiar with Trump's plan? Let's take a look at what he's proposed to do with individual income tax brackets and see how it could ultimately affect you.

As part of the ethos of the Republican Party, Trump's tax plan predominantly revolves around the idea of cutting taxes on all Americans, as well as corporations, to ignite growth. The idea is that if corporations have more disposable cash, they'll be more liable to hire workers, raise wages, and expand. And if consumers have access to more jobs, better wages, and are able to keep more of their income, the U.S.' consumer-based economy should roar higher.

How much would you owe?
How exactly would he accomplish this? Let's take a quick side-by-side comparison of the income tax brackets as they are now, according to data from the IRS, and then examine how Trump would act to lower and simplify the individual income tax brackets.

Here's what the progressive income tax brackets look like today:

Table by author. Data source: IRS 2016 income tax brackets. 

And here's what they'd look like if Trump were elected president and his tax plan were passed in its entirety:

Table by author. Data source: Donald Trump, Tax Foundation.

As you can see above, these are some big changes. Trump manages to condense the current income tax brackets from seven progressive brackets to just four. You'll note the creation of a pretty substantial 0% ordinary income tax bracket, which would allow for individuals to earn up to $25,000 without being taxed, and give married filers the ability to bring home $50,000 before paying a cent in taxes. From there, we would see a progressive increase in ordinary income tax rates to 10%, 20%, and the highest marginal tax bracket of 25%. However, you'll see that compared to the current income tax brackets, at least on a static basis, everyone's ordinary tax rate falls.

In terms of long-term capital gains and qualified dividends, Trump wants to attempt to encourage investment, which is no surprise since his fortune was made through investments in real estate. Single and married filers could earn up to $50,000 and $100,000, respectively, without paying a cent in dividend and capital gains taxes. From there, as you can see above, capital gains taxes would grow to 15% or top out at 20%, depending on which income category you and your household fall into.

Other tenets of Trump's tax plan include the elimination of the Alternative Minimum Tax, the scrapping of the net investment income surtax, and a big cut in corporate income tax rates from the current rate of 35% to just 15%. Additionally, Trump would offer corporations a one-time tax holiday rate of 10% so foreign corporate earnings could be repatriated. 

Trump's perceived economic impact
How might Trump's plans impact the economy? According to findings from the Tax Foundation, Trump's proposals would reduce tax revenue by almost $12 trillion over a 10-year period on a static basis. However, when taking into account the potential for higher capital investments and more money in the pockets of businesses and consumers, the Tax Foundation's models predict a net negative effect of $10.1 trillion over the next decade.

The Tax Foundation forecasts that Trump's tax proposals could lead to a long-term growth of 11.5% in U.S. GDP and that roughly 5.3 million jobs would be created. Furthermore, it believes wages would expand by 6.5%, and the capital investment from businesses would spike 29%.

As a note of consideration, it is worth pointing out that the Tax Foundation's models are its own, and they are nothing more than projections. It's possible the actual results of a Trump presidency and these projections may be nothing alike.

Benefits and concerns
Although Trump's plan would result in what appears to be an increase in after-tax income for all Americans, and it would definitely simplify the current tax system by going from seven income tax brackets to only four, the only important question is; Would it work? The reality is there are quite a few benefits and potential pitfalls in Trump's tax reform plan.

Image source: Getty Images.

On the bright side, we have a static increase in disposable income for corporations and consumers. Americans are generally poor savers when compared to the rest of the developed world, but the added money in their pockets could allow them to consume more. Since more than two-thirds of U.S. GDP is based on consumption, the assumption is that U.S. GDP growth would get a boost.

Likewise, the boost in income for corporations may spur business expansion, internal investment, higher wages to retain talent, and perhaps even bigger shareholder incentives for investors of publicly traded companies. In other words, Trump's tax plan could be viewed as a positive for Wall Street and investors since it encourages saving and investing.

Finally (looking at the corporate angle), Trump's tax holiday for foreign earnings could allow some of the $2 trillion-plus in profits held overseas to reenter the U.S. and get put to work. Doing so could give American businesses the edge that he believes would make America great again.

Trump's plan, however, also raises some serious concerns.

Let's begin with the $12 trillion static decline in tax revenue. While the vast majority of taxpayers don't like to pay taxes, those taxes are needed to fund entitlement programs like Social Security, Medicare, and Medicaid, which eat up about half of the annual federal budget. When you add in the costs to finance our country's net interest debt, we're talking about close to 60% of our nation budget in four items. Trump's proposal would actually wind up reducing the income the federal government takes in, which means the national deficit would probably continue to grow, and long-term funding to these entitlement programs would be somewhat clouded.

Image source: Getty Images.

Another problem can be seen in the Tax Foundation's analysis of after-tax income based on select income deciles. Although all income brackets get a boost, lower-income individuals see only minuscule increases in after-tax income. The real boost in static after-tax income goes to upper-middle-class and wealthy households. Under Trump, we'd see a likely expansion of income inequality. The problem with growing income inequality is that it works to keep the poor from advancing up the economic ladder since they'd probably continue to lack the tools necessary to pay for college or get proper medical care.

Finally, some pundits have argued that we could actually see tax loopholes increase rather than closed if Trump's simplified tax reform is implemented.

For instance, some high-income business owners could attempt to rearrange their finances in order to take advantage of pass-through taxes, or individual income taxes paid on a company's earnings. The peak marginal corporate tax rate for corporations is just 15% under Trump's proposal, but that's well below the already reduced peak ordinary tax rate of 25%. If loopholes become rampant, the revenue created from Trump's tax plan may undershoot by a substantial amount, leading to an even bigger national deficit. 

How would your wallet fare under a Trump presidency? Share your comments below.