The tax plan released on Wednesday by the Trump administration is built around three basic principles: cut, cut, and keep cutting until it adds up to what White House is calling “The Biggest Individual and Business Tax Cut in American History.”
Details are too sparse to judge the merits of that claim, but there is no doubt Trump and his aides have put together an extremely ambitious — and costly — proposal, adding up to several trillion dollars over the next 10 years.
The biggest benefits would go to businesses, which would see the top corporate rate drop by more than half while their overseas earnings would be exempt from US taxes.
Individuals would get some relief, too, but the biggest potential savings would go to the wealthy with the repeal of the estate tax, the Alternative Minimum Tax, and the surcharge on capital gains.
Here’s a rundown of the key parts of Trump’s plan, which the administration acknowledges is merely the starting point for what will likely be a long and contentious negotiation with Congress.
■ Reduce personal income tax rates. Instead of seven tax brackets, Trump’s plan calls for three: 10 percent, 25 percent, and 35 percent (down from 39.6.) And while we don’t yet know where the cutoffs would be, changes like this nearly always benefit higher-income American households above others. That’s hard to avoid, because lower-income Americans pay little to nothing in federal income tax, which means cuts can’t help them.
■ Repeal the estate tax. It’s been pilloried as a “death tax,” but the idea behind taxing high-value estates is to ensure economic mobility and limit inherited wealth. Only the richest 0.2 percent of US households pay this tax, so repealing it will have a very concentrated impact.
■ Repeal the Alternative Minimum Tax. The AMT is designed to ensure that high earners can’t bring their tax bill down to zero by invoking all manner of deductions and loopholes. Instead, the AMT requires them to pay a baseline amount. Over the years, this provision has expanded to affect more middle-income families, so some reform is widely supported. But estimates suggest a full repeal would cost the federal government about $400 billion over 10 years.
■ Repeal the surcharge on capital gains. The Obama administration introduced a 3.8 percent surcharge on high-income households with capital gains, as part of its effort to help lower-income families purchase health care. Trump would eliminate that surtax entirely, a break for those booking profits on stocks, a house, or other assets.
■ Eliminate tax breaks. To help offset the cost of these cuts, the Trump plan calls for closing unspecified loopholes, including the popular deduction for state and local taxes. However, two of the biggest and most popular loopholes are explicitly off-limits: the deduction for charitable giving and for mortgage interest. Keeping those greatly reduces the potential benefits of a loophole-closing approach.
■ Double the standard deduction. When filing taxes, every family gets to shield a certain amount of income — no receipts or specific deductions required. Doubling that amount could potentially help a wide range of taxpayers.
■ Increased child-care tax credits. Inspired by his daughter Ivanka, Trump has proposed new credits that would help parents cover the cost of child care. Previous proposals have been tilted to benefit wealthy parents, but there’s talk of a more middle-class-friendly approach this time around.
■ Cut business income tax rates. Currently, the top rate for businesses is 35 percent, though deductions and tax avoidance strategies mean that in reality many businesses pay a lot less than that. Still, Trump wants to cut the rate to 15 percent. This is the most expensive single change in the entire tax plan, amounting to more than $2 trillion over 10 years.
■ Cut rates for pass-through companies. Small partnerships, independent contractors, and some larger firms don’t pay corporate taxes; instead they treat their business income more like a salary and include it with their individual income tax filings. Trump’s 15 percent rate would also apply to them — and it would probably induce more people to become independent contractors.
■ Tax foreign-held profits. When US companies earn profits overseas, they don’t have to pay taxes until they bring those dollars back home, a provision that encourages companies to stash cash abroad. Trump is calling for a one-time tax on these overseas funds. But while this move would raise a substantial amount of revenue in the short term, keep in mind that most of this money was going to be taxed eventually (perhaps years from now.) So taxing it today, at a lower rate, could actually reduce long-term revenues.
■ Introduce a territorial tax system. While this aspect of the plan is particularly vague, the basic idea is to somehow stop taxing companies’ overseas earnings and focus just on their domestic operations. Lots of other countries take this tack, but generally with sharper protections against offshoring, tax avoidance, and the use of tax havens.
While it’s easy to get lost in the details, the toughest question for Trump’s tax plan is the big one: Is it good for the country?
Would a massive tax cut for US business and individuals unleash our untapped economic potential?
Or would it drive up the deficit, further enrich the wealthy, and starve the government of vital funds for such programs as national defense and health insurance.
In the weeks (and months) ahead, these questions are the ones likely to dominate debate both in Washington and around the country.
Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz.