Tax Reform in the Trump Era Has a Rocky Start

President Donald Trump and the "Big Six" are already hitting some major tax reform roadblocks.
October 7, 2017
10 mins read

This past Wednesday, September 27 in the state of Indiana, President Donald Trump presented the specifics of the tax reform plan that he and the “Big Six,” have been working on.

The “Big Six” consist of the following key proponents for the reforms: House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin, Chief Economic Advisor Gary Cohn, House Ways & Means Committee Chairman Kevin Brady, and Senate Finance Committee Chairman Senator Orrin Hatch of Utah. Although the tax reforms seem promising, Trump’s staff must work diligently to ensure the tax reforms benefit middle-class Americans.

To start, raising the standard deduction to $24,000 for married couples and $12,000 to single filers as compared to the current $12,600 and $6,300 respectively does offer tax relief for married couples and single filers. Even with the elimination of the $4,050 personal exemption from tax offered in the current system, American middle-class families still stand to benefit from Trump’s proposed reforms, for example, an average American family of four filing for $30,000 after standard deductions potentially being taxed 12 percent, depending on the income ranges, would result in a $400 decrease in taxes as compared to the current system.

American middle-class families will be hit hard — and for Tax services, Cooper Parry can help — however, unless income ranges, which have yet to be established, within the tax brackets will have greater breadth. In this case, finding the funds to pay for these tax breaks would also be problematic.

Trump’s administration also aims to cut corporate taxes from 39.6 percent to 20 percent—a move to keep American money on American soil, rather than elsewhere, thereby ensuring that American businesses “buy American and hire American.” In ten years, this corporate tax cut would require funds of $1.8 trillion dollars—already exceeding the proposed $1.5 trillion budget for the entire tax reform plan. Although acceptable in theory, the reality does not stretch as far.

Notably, Trump and the “Big Six” plan to limit the previous seven tax brackets to three, consisting of 12 percent, 25 percent and 35 percent. Trump’s administration has yet to determine the details of the full tax reform, especially the income cut-offs for each bracket, but it is reflecting on the addition of a fourth bracket that would “apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code.” If it appears that the top 1 percent enjoy a decent tax break, Republicans will lose the vote of many Democrats who would not vote for this tax break aimed towards the wealthy. In this regard, the fourth bracket may garner more support from Democrats.

Trump’s administration also aims to repeal the estate or death tax—the tax business owners pay who would like to transfer ownership from one owner to another after death. While it may appear that the move benefits small business owners, most states follow the $5.49 million federal limit of taxation on an owner’s estate, which most owners do not exceed. That being said, the wealthy who do have assets beyond this amount benefit from this tax cut the most. It also should be noted that the cost to cut this tax is $0.2 trillion—one of the lower amounts among the proposed reforms.

Other noteworthy aspects of Trump’s tax reform plan are the tax credits. His administration aims to increase the child tax credit to $1000 in addition to adding a $500 tax credit for the elderly or sick dependents to alleviate financial burdens on family members. These tax credits will not be acceptable in tax refunds either.

The major problem with Trump and the “Big Six’s” tax reforms is the funding involved to pay for tax cuts. As Forbes contributor Tony Nitti outlines thoroughly in his piece, the total tax cut allowable through the reconciliation is $1.5 trillion dollars, but Trump’s tax reforms would make tax cuts of $3.5 trillion dollars. Theoretically, Congress used this process to enact legislation that makes minor adjustments to spending and revenue levels but historically is used to pass large-scale spending and revenue policies. Nitti proposes increasing taxes on capital gains—an increase of the value of a capital asset that gives it a higher worth than the purchase price—has been a historical loophole for corporations for a long time. He also asserts that increasing the tax rate on dividends—a distribution of a company’s earnings to a class of its shareholders—would also help to pay for these tax cuts.

Some individuals have even likened Trump’s tax reforms to President Ronald Reagan’s Tax Reform Act passed in 1986 which, just as Trump’s administration endeavors to do, simplified the tax code in a number of ways. First, the tax reform reduced the top marginal individual income tax rate from 50 percent to 28 percent. The reforms reduced the corporate income tax rate from 46 percent to 34 percent and reduced the number of tax brackets from 14 to 2—a remarkable shift and one in which Trump’s administration aims to emulate. However, Reagan’s tax reforms were short-lived as succeeding presidents H. W. Bush and Clinton raised the individual tax rate from 28 percent to 31 percent and then 39.6 percent respectively.

Despite the overturning of his reforms, we can learn something from Reagan’s Tax Reform Act. A living, former domestic policy advisor in the Reagan White House, Bruce Barlett, said that fairness was the touchstone for the Act. “Keep in mind that one of the most important elements of that deal was that Ronald Reagan agreed to raise the capital gains tax rate from 20 percent to 28 percent because he agreed with the Democrats that capital gains and ordinary income ought to be taxed at the same rate,” says Barlett. Reagan’s Act places importance on both the individual and the corporation.

Another lesson we can learn through the passing of the 1986 Act is the value of bipartisanship and search for a win-win solution to a national problem among Congress members. “The 1986 act was really a coming together of the liberal idea of getting rid of tax loopholes with the conservative idea of flattening the tax rates,” Barlett says, “and so each side [of Congress] felt that they had something to gain by the effort.” Members on both sides of Congress may enjoy having the last say, but ultimately it is the American people that suffer at the expense of this game of cat and mouse. Times sure have changed, but the underlying values that hold up American democracy can be and are still present today.

Although there are some clear issues that Trump’s tax team have and will encounter with the new tax reform, as Hatch claims, “The American people need us to go the distance.” Hatch asserts that the tax reform framework is not fully realized, but rather much work is required for it to be complete.

In order to bring the tax reforms successfully to the American people with all of its potential for benefitting the middle and lower classes, Trump’s administration must work together with Democrats to achieve these reforms. In the words of Barlett, Trump’s administration must work to revise the current proposed tax reform plan to offer gains to both sides of Congress.

Elizabeth Ivanecky, McMaster University

Writer Profile

Elizabeth Lucy Ivanecky

McMaster University
English & Cultural Studies, History, and French Studies

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