President Donald Trump released a preliminary draft of his tax reform plan on Wednesday, April 26h 2017. Many are wondering; will this plan (or a comparable one) disproportionately benefit the wealthiest Americans if it should come to fruition? The document was devoid of details so it is difficult to say how the plan will benefit low-income to middle-income individuals. “We have a once-in-a-generation opportunity to do something really big,” said Gary Cohn, Chief Economic Adviser to Donald Trump. “This is about growing the economy, creating jobs.”1
So, what’s in Trump’s trickle down tax reform plan? For starters, the plan would cut the number of current individual income tax brackets from seven to three (making the brackets 10 percent, 25 percent and 35 percent) and it would slash American corporate tax rates from 35 percent to 15 percent.
Trump’s plan to cut the corporate tax rate by more than half disproportionately favors the wealthy because corporate profits flow to the owners of corporate stocks, who tend to be rich.2 More than 92.8 percent of households earning at least $250,000 a year own at least $10,000 in stock, according to research from New York University economist Edward N. Wolff. By contrast, he notes just 19.1 percent of households that earn$25,000 to $49,999 own $10,000 in stocks. Households in the top 1 percent receive an average of 36 percent of their income from capital gains (stocks, bonds and other financial investments), according to the Congressional Budget Office. However, Americans earning the lowest 20 percent of income receive an average of about 5 percent of their earnings this way.
BUSINESSES AND FINANCIAL INSTITUTIONS
The 15 percent corporate tax rate would also apply to “pass-through” corporations. Some pass-through corporations are small businesses. Others are: hedge funds, law firms, or other vehicles for wealthy people to collect specialty income such as book royalties. Pass-throughs are businesses set up as sole proprietorships, S corporations and partnerships (e.g., LLCs, LLPs, etc.). Pass-throughs are not taxed under the corporate code. Instead, their profits flow to the owners, partners and shareholders, who then report and pay tax on them through their individual tax returns.3 Business owners are poised to greatly benefit, especially the wealthiest amongst them. According to his plan, Trump is calling for a reduction in the business tax rate on pass-through entities to 15 percent from 39.6 percent.
Moreover, Trump would also repeal the 3.8 percent tax on stocks, bonds and real estate investments, which is considered an add-on tax that Obamacare imposed on individuals making at least $200,000 per year.
THE ESTATE TAX
Trump’s plan also repeals the estate tax, which only benefits the very wealthy. It taxes the estate of a deceased person, but only if the estate is worth more than $5.49 million ($10.98 million for married couples). Heirs and heiresses pay an average rate of 16.6 percent on these inheritances, according to the Center on Budget and Policy Priorities, generating about $275 billion for the government over 10 years.4
TAX ON WEALTHY INDIVIDUALS
The Alternative Minimum Tax (AMT) would also be eliminated if the plan is passed, which would generally benefit financially comfortable individuals. The AMT impacts roughly 5 million tax filers in the U.S., according to the Brookings Institution. The AMT was initially intended for very wealthy Americans. Since the AMT wasn’t indexed for inflation until 2013, the number of people who fall under the AMT umbrella has increased significantly since the 1970s and includes “30 percent of households with cash income between $200,000 and $500,000,” according to figures from the Urban-Brookings Tax Policy Center cited by Bloomberg. In total, it applied to 3 percent of all taxpayers in 2005, according to data from the IRS. Trump’s tax reform plan would reduce the number of tax brackets from seven to three, reducing the top rate from 39.6 percent to 35 percent. However, there was no mention of the income level ranges that would apply to the new brackets. The plan also would be expected to protect deductions for mortgage interest, which benefits homeowners. Moreover, the standard deduction could potentially be doubled.
So, who benefits the most? According to the TPC, of the $6.2 trillion in cuts over the next ten years, the wealthiest 1 percent would reap 47 percent of those cuts, or nearly $3 trillion over ten years. The middle class (the wealthiest 20 – 80 percent of the population) would receive only 20 percent of tax cuts: Trump’s advisers claimed that economic growth of 3 percent would pay for the trillions of dollars in proposed tax cuts. The administration did not offer a legislative timeline for its tax agenda. The Tax Policy Center estimated in November that Trump’s 15 percent proposal for corporations and pass-throughs, coupled with a repeal of the corporate Alternative Minimum Tax, could reduce revenue by nearly $4 trillion in the first decade which is close to $400 billion a year and more than the $304 billion the government spent last year on income security programs such as food stamps, unemployment benefits and child nutrition.6 However, this is another topic well deserving of its own attention. Stay tuned as the Trump Administration pushes its agenda on tax and healthcare reform. On Tuesday, May 30, 2017, President Trump called on the Senate to do away with its legislative filibuster, a move Trump said would enable the body to pass two pieces of legislation to avoid the 60-vote threshold.
This chart depicts the middle class, on average, would gain an average of approximately $1,500 to spend each year if the proposed President’s plan is accepted. However, the wealthier quintile would gain an additional $16,660. Although the dollar savings are correspondingly larger because this quintile earns more money, it is significant to note the percentage column, which confirms the plan’s regressivity, meaning it disproportionately benefits the richest taxpayers on a percentage — rather than absolute dollar — basis.5
Mark Martiak is a New York based Investment Advisor for Premier Wealth Advisors LLC. Mark is a regular Contributor for VEGAS LEGAL MAGAZINE who has appeared on CNBC’s CLOSING BELL, YAHOO! FINANCE MIDDAY MARKET MOVERS, FOX BUSINESS NETWORK and has been quoted in THE WALL STREET JOURNAL.
Securities offered through: First Allied Securities, Inc. A Registered Broker/Dealer. Member: FINRA /SIPC. Advisory Services offered through: Premier Wealth Advisors, LLC. (PWA) & First Allied Advisory Services, Inc. (FAAS). Both Registered Investment Advisers. PWA is not affiliated with First Allied Securities, Inc or FAAS.
- TheGuardian.com, “Trump under fire over ‘huge tax cut for the rich’”, https://www.theguardian. com/us-news/2017/apr/26/trump-tax-cuts-proposal-deductions-brackets?CMP=share_btn_ link (4/26/2017)
- Huffingtonpost.com, “Trump’s Tax Proposal Would Be Ridiculously Good For Rich People” http://w w w.huf f ingtonp ost.com/ent r y/t r ump-t ax-pl an-r ich-p e ople_ us_5900ef4be4b0af6d718afb4e (4/26/2017)
- CNN.com, “The two biggest ways the Trump family could benefit from his tax plan”, http://money.cnn.com/2017/04/28/news/economy/trump-tax-plan-trump-benefit/ (4/28/2017)
- Huffingtonpost.com, “Trump’s Tax Proposal Would Be Ridiculously Good For Rich People” http://www.huffingtonpost.com/entry/trump-tax-plan-rich-people_ us_5900ef4be4b0af6d718afb4e (4/26/2017)
- Forbes.com, “Trump’s ‘Massive’ Middle-Class Tax Cuts Are Tiny Compared To Those Promised To The Rich” https://www.forbes.com/sites/anthonynitti/2017/03/01/president-trump-promises-massive-middle-class-tax-cuts-but-will-he-deliver/#1e1d2df66b9e (3/1/2017)
- CNN.com, “Trump aides try to steer tax reform on Capitol Hill”