Taxes: What Can We Expect?

The reader can be forgiven for failing to keep up with all the tax proposals floated by the incoming Trump Administration because some of them seem to have been off-the-cuff ideas given to interviewers, while others reflect actual policy proposals.  But if we focus only on the policy proposals, we might be able to see what will emerge in the coming months.

First, don’t expect big changes in the tax rates and brackets; the clearest proposal is to make the 2017 tax changes permanent.  That includes the rates and brackets, the standard deduction and personal exemption, the child tax credit and the very generous estate tax exemption.  

What would change?  The $10,000 cap on federal deductions for state and local taxes is likely to be removed—which would be welcome to people living in high-tax states like New York, California, Connecticut etc.  There’s a proposal to exempt tips from income taxes, which has come under fire because the fine print shows that this tax exemption seems to include a loophole that would allow hedge fund managers to recharacterize some or all of their compensation to a tax-free tipping model.

Other proposals would exempt Social Security benefits and overtime pay from income taxes, and make auto loan interest deductible.  The top corporate tax rate on companies that produce goods and services in the U.S. would drop dramatically.

Another (largely hidden) tax would come from a proposed 20% across-the-board increase in tariffs on imported goods, and a 60% increase in goods imported from China.  Companies that outsource parts manufacture to China and other countries would almost certainly have to raise prices to compensate.  The tariff monies would go to Washington and the estimated $3.8 trillion (over 10 years) bill would be passed on to consumers (and, to some extent, the companies that absorb some of the costs)—which is the definition of a tax, even if it’s hardly visible.

If you add it all up, the Tax Foundation estimates that people in the lowest 40% of income would see tax increases overall, while middle income taxpayers would experience very slight tax cuts.  The top 20% income earners would experience significant increases in after-tax income.

Of course, these cuts have to be paid for.  Or do they?  The Tax Foundation estimates that the overall impact of the tax proposals would increase the federal deficit by just under $6 trillion over ten years.

Sources:

https://www.americanprogress.org/article/sen-ted-cruzs-no-tax-on-tips-act-does-little-for-low-and-moderate-wage-workers-but-opens-door-to-tax-abuse-by-wealthy/

https://taxfoundation.org/research/all/federal/donald-trump-tax-plan-2024/