Thread: Trump Tax Plan Would Shift Trillions From U.S. Coffers to the Richest

Trump Tax Plan Would Shift Trillions From U.S. Coffers to the Richest

By JULIE HIRSCHFELD DAVIS and PATRICIA COHEN
APRIL 27, 2017

Photo

President Trump and the first lady, Melania, at the White House on Thursday. Mr. Trump could benefit substantially from his tax plan, with provisions such as a repeal of the alternative minimum tax and a proposal to allow owner-operated companies, including his real estate concern, to be taxed at a 15 percent rate.CreditStephen Crowley/The New York Times

WASHINGTON — President Trump’s proposal to slash individual and business taxes and erase a surtax that funds the Affordable Care Act would amount to a multitrillion-dollar shift from federal coffers to America’s richest families and their heirs, setting up a politically fraught battle over how best to use the government’s already strained resources.

The outline that Mr. Trump offered on Wednesday — less a tax overhaul plan than a list of costly cuts with no price tags attached, rushed out by a president staring down his 100-day mark in office — calls for tax reductions for individuals of every income level as well as businesses large and small.

But the vast majority of benefits would accrue to the highest earners and largest holders of wealth, according to economists and analysts, accounting for a lopsided portion of the proposal’s costs.

“The only Americans who are very clear winners under the new system are the wealthiest,” said Edward D. Kleinbard, a law professor at the University of Southern California and former chief of staff of Congress’s Joint Committee on Taxation, which estimates the revenue effects of tax proposals.

Repealing the estate tax, for example, would affect just 5,300 or so fortunes a year. For 2017, couples can shield up to $11 million of their estates from any taxation, leaving only the largest inheritances subject to taxation. Repealing the estate tax alone would cost an estimated $174.2 billion over a decade, the nonpartisan Tax Policy Center said.

Reducing the rate on capital gains, noncorporate business taxes and those in the highest bracket, as well as repealing the alternative minimum tax, would also ease the burden on wealthier Americans. So would the repeal of the Affordable Care Act’s 3.8 percent surtax on the investment income of high earners, put in place to subsidize health coverage for low-income Americans.

“These are all afflictions of the affluent,” Mr. Kleinbard said.
There is no way to know how the mathematics of the proposal would work, since the White House offered no cost estimates, no detail about which incomes would be taxed at what levels and no information about tax deductions or other breaks that might be eliminated to make up for the lost revenue.

On Thursday, Sean Spicer, the White House press secretary, suggested that tax benefits for retirement savings would be rolled back to mitigate the cost of the tax cuts, the kind of tough decision that makes a rewrite of the tax code so politically difficult. But within minutes, White House officials said Mr. Spicer had misspoken.

Officials instead said specifics would come later, as negotiations unfolded with members of Congress to draft legislation.

The administration’s silence on many crucial details of the proposal was by design, to leave room for what promise to be intense negotiations with lawmakers in Congress, said Rohit Kumar, the leader of PwC’s Washington National Tax Services and a former senior Republican Senate aide.

Yet without specifics, he added, “you can’t make anything but a wild guess on what the distributional effects of the proposal would be.”

“What the administration put out yesterday is all of the good news,” Mr. Kumar said. “They’ve withheld on the bad news.”

But estimates of the impacts for some of the cuts that were outlined Wednesday, such as the estate tax and alternative minimum tax repeals, can be made, and they run directly counter to the populist themes that animated Mr. Trump’s campaign. He has often stated his concern for ordinary working men and women who he contends were forgotten under previous administrations but have risen to the top of the priority list under his leadership.

Many economists who analyzed a similar plan Mr. Trump proposed during his presidential campaign found that it would have disproportionately helped the richest. William G. Gale, an economist at the Brookings Institution in Washington, estimated that just over 50 percent of the benefits of that proposal would have gone to the top 1 percent of taxpayers.

The new proposal “loses probably something in the neighborhood of $5 trillion in revenue over 10 years with regressive tax cuts that exacerbate the inequalities that already exist in our economy,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities who was a top economist in the Obama administration.

Mr. Trump’s economic team argues that there is no disconnect; the tax reductions they are seeking, they argue, will ultimately help all Americans, including the poorest, by spurring growth that will translate into more jobs and better wages.

Still, it seems almost inevitable that the blueprint, should it eventually yield legislation, would violate the vow Steven Mnuchin, the Treasury secretary, made that the administration would provide “no absolute tax cut for the upper class.”

That axiom, uttered by Mr. Mnuchin in November and quickly named the “Mnuchin rule” by skeptical Democrats, was based on his insistence that any tax reductions at the top would be matched by the elimination of deductions and loopholes.

“It is hard to know what the overall effects would be, but a plan that is intended to reduce taxes on business income and investment income is going to provide substantial benefits to wealthier individuals, and the bulk of the benefits in this plan would go to them,” said Ed Lorenzen, a senior adviser for the nonpartisan Committee for a Responsible Federal Budget, a fiscal policy education group. “It would probably work out to be a significant shift in the distribution of the tax code.”

One major reason is Mr. Trump’s idea to allow the income of owner-operated companies, including his real estate concern, hedge funds and large partnerships, to be taxed at a 15 percent rate — the same rate corporations would pay under his plan — rather than at the individual income tax rate, which now tops out at 39.6 percent and would be set at 35 percent by Mr. Trump.

That would potentially allow doctors, lawyers and others who are part of such firms to structure their compensation as business rather than personal income and effectively enjoy a substantial tax cut. The Tax Policy Center estimated last year that the proposal would cost $1.5 trillion over a decade.

Higher earners also appear likely to reap the greatest benefit from repealing the alternative minimum tax, which is set at a marginal rate of 28 percent and falls most heavily on those who earn between $250,000 and $1 million. In 2013,

President Barack Obama and Congress reached agreement on a “fix” that shielded middle-class families from the tax. So any repeal now would benefit wealthier taxpayers.

Only a fifth of taxpayers who earn above $1 million were affected by the provision, a parallel tax system that limits the deductions and other tax breaks available to them, in part because interest and investment income are exempt.

A glimpse of Mr. Trump’s 2005 tax returns revealed that the alternative minimum tax cost him roughly $31 million by setting a floor that even a stack of individual loopholes could not reduce. Repealing it would cost $412.8 billion over a decade, the Tax Policy Center has estimated.

At the same time, lower- and middle-income families could be in a worse position. The White House proposes to reduce the number of tax brackets from seven to three: 10, 25 and 35 percent. But no one yet knows where the income cutoff lines are being drawn. People who end up being pushed into a lower bracket would be better off, but those kicked into a higher bracket would not be.

Families with after-tax income between roughly $19,000 and $76,000, for example, are now in the 15 percent marginal tax bracket, which is slated for elimination.

“That’s where the middle of America is,” Mr. Kleinbard said. While some may drop into the new 10 percent bracket, others could be nudged up into the 25 percent range.
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Increasing the standard deduction to about $24,000 for couples might also appear to help most families, but that is not necessarily the case, Mr. Kleinbard pointed out. Larger families, which now benefit from being able to add a deduction for every additional member of their household, could lose out.

“At the bottom end, the typical family will be worse off if personal exemptions go away,” he said.

https://www.nytimes.com/2017/04/27/u...ax-wealth.html

Trump tax plan would hit blue states hardest

By Reid Wilson - 04/27/17 03:47 PM EDT

President Trump’s plan to overhaul the federal tax code threatens to fall disproportionately on residents of liberal-leaning states, a short-term boost for state governments that could turn into a long-term drag.

Most states have tied their tax codes closely to the federal code. Since the federal income tax was first levied in 1913, taxpayers have been able to deduct the state and local taxes they pay from their federal taxable income. Taxpayers who live in states with higher tax rates are able to deduct more from their federal taxes than those who live in states with lower rates

Those deductions cost the federal government more than $60 billion a year, according to the nonpartisan Tax Policy Center.

Trump has proposed ending that state and local tax deduction. Experts who reviewed Trump’s outline, issued Wednesday, said that will mean higher taxes for those who live in states with more progressive tax codes, like California, New York, Oregon and New Jersey.

“Individuals, particularly in high-tax states, would see their state tax burdens increase. The federal government is essentially subsidizing high tax rates in states like California and New York,” said Nicole Kaeding, an economist at the Center for State Tax Policy. “Those taxpayers would be impacted pretty directly by the Trump tax plans.”

In the short run, eliminating the deduction would mean taxpayers would have to report a higher income — meaning state tax bases would grow, at least a little bit. That could make a difference for policymakers in states where tough financial times have meant penny-pinching during budget negotiations.

In Oregon, lawmakers are trying to close a billion-dollar budget hole as revenues fall short of projection. New Jersey lawmakers grappled with their own billion-dollar shortfall last year. And in his initial projections, California Gov. Jerry Brown (D) said his state would have to cut costs to avoid a $2 billion deficit this year.

“The states that have higher progressive taxes and higher income residents who benefit from deductibility tend to be blue states,” said Iris Lav, a senior fellow at the left-leaning Center on Budget and Policy Priorities.

“This discount is pretty important, especially for states that want to have a somewhat higher and more progressive income tax.”

History suggests states are likely to react to the Trump tax cuts, if they make it through Congress. The last time Washington overhauled the federal tax code, in 1986, Congress eliminated a general sales tax deduction, and several states cut their taxes to come into line with the new federal code.

Other states made changes, too, in ways that allowed them to capture some additional revenue. States like Minnesota and New York dramatically reduced the number of tax brackets they levied on their own citizens.

“Likely, what you would see is that states would make some changes” to their tax code after the federal plan is passed, Kaeding said. But states would be unlikely to make those changes this year, given that many budgets are already written ahead of the start of the new fiscal year in July.

Ending state and local tax deductions would have a significant impact on taxpayers who itemize their taxes. More than 45 percent of those earning between $50,000 and $100,000 a year itemized their taxes, according to the IRS and the Tax Foundation.

More than 80 percent of those earning over $100,000 did so, and the state and local tax deduction cut their adjusted gross income by more than 6.5 percent.

Other elements of Trump’s tax plan present a more immediate threat to state budgets: Fourteen states and the District of Columbia levy a tax on wealthy estates, and all but one of those states depends on the federal estate tax to do so. Trump has proposed eliminating the estate tax, which could cost those states $3 billion in annual revenue.

And states are closely watching how Congress and the Trump administration handle pass-through businesses. The current proposals would allow some businesses to pay lower rates on their profits, which could further reduce a state’s tax base.

The short-term boost in tax revenue could help mitigate some of those budget gaps, at least at the margins. But coupled with deep cuts the Trump administration has proposed for social programs and health care, that boost could be little more than a band-aid on a deeper cut.

“We have budget shortfalls coming up in at least half the states,” said Lav, of the Center on Budget and Policy Priorities. “They’re very worried about the cuts in programs and health care and so forth.”

http://thehill.com/homenews/state-wa...states-hardest