Former President Donald Trump has proposed a range of tax policy initiatives, including extending the provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire, reinstating the deduction for state and local taxes (SALT), lowering the corporate tax rate for domestic production, exempting certain income types from taxation, eliminating green energy tax credits, and introducing significant new tariffs.
Certain tax proposals put forth by Trump are thoughtfully constructed and could serve as effective mechanisms to foster sustained economic growth. However, certain aspects of his tax proposals are inadequately structured and would deteriorate the integrity of the tax code while having a minimal effect on long-term economic growth, including the exemptions for tips and Social Security income.
Revenue Effects of Trump’s Tax Proposals
There are some business tax implications under trump 2.0 that could drastically affect taxes and IRS filings. The five significant tax reductions suggested by Trump include the exclusion of tips, Social Security, and overtime pay from income tax, the establishment of an itemized deduction for auto loan interest; and a reduction of the corporate tax rate to 15 percent for domestic production. These measures would contribute an additional $2.5 trillion to the projected revenue decrease over a decade.
The establishment of permanence for the individual provisions of the Tax Cuts and Jobs Act (TCJA) will lead to a revenue decrease of $3.4 trillion if the State and Local Tax (SALT) cap is maintained indefinitely. Conversely, if the individual provisions are extended without imposing a cap on SALT, this would contribute an additional $1 trillion to the 10-year revenue projection, culminating in a total revenue reduction of $4.4 trillion.
Potential Deficit Impact of Trump’s Tax Proposals
In the formal assessment of the principal proposals, it’s been projected that revenue would decrease by $3 trillion under conventional measures and by $2.5 trillion under dynamic measures from 2025 to 2034. The proposals put forth could be interpreted in a wider context. For example, the exemptions concerning overtime pay and tips could extend to the payroll tax as well as the income tax.
Trump intends to transition the United States to a residence-based tax system for individuals residing overseas, allowing them to avoid the obligation of filing and paying U.S. income tax. This initiative is projected to decrease federal revenue by approximately $50 billion to $100 billion over a decade on a conventional basis. While this reduction in revenue could potentially be compensated through new income generated from transition taxes or fees associated with the new system, Trump has not provided specific details regarding these measures.
Taking into account these additional possible tax reductions, it appears that Trump’s tax proposals may lead to a decrease in revenue that is nearly double the amount suggested by our officially assessed estimates, potentially resulting in a total of up to $6 trillion in net tax reductions over a decade.
The Effect Of Tariffs
To analyze the economic implications of tariffs, they are considered an excise tax imposed on imports to the United States. This classification of tariffs creates a disparity between the price consumers pay and the price received by producers. Consequently, tariffs diminish the revenue available to businesses for compensating their employees and shareholders, leading to a decline in real incomes.
The Biggest Benefits Of The Tax Cuts and Jobs Act (TCJA)
The TCJA significantly reduced the corporate tax rate to a maximum of 21% for C-Corporations. Furthermore, it introduced the Qualified Business Income (QBI) deduction, which enables various business structures, including single-member LLCs, pass-through entities, and certain trusts and estates, to exclude up to 20% of their business income from taxation. The TCJA also revised the rules regarding bonus depreciation, allowing for 60% accelerated depreciation in the first year for specific fixed assets starting in 2024, with this percentage decreasing by 20% each subsequent year until it reaches zero. Additionally, the TCJA established opportunity zones to promote economic investment in underutilized areas through tax incentives.
How Income Taxes Might Be Changed
Trump has proposed a streamlined tax structure with only two rates: 15% for lower earners and 30% for individuals earning over $170,000 annually. In his plan, he aims to reduce the number of tax brackets and has indicated a desire to eliminate a majority of deductions, credits, and exclusions. Trump’s focus is on simplifying the tax return process and decreasing the financial burden on the U.S. government associated with tax administration. While this approach may alleviate some complexities during tax season, it could potentially lead to an increase in the total tax burden for individuals.
“No Tax On Tips” Is More Complicated Than It Sounds
Trump’s campaign commitment to “no tax on tips” garnered significant media attention. However, as reported by the Budget Lab at Yale University, this measure would impact only a minor segment of the workforce: approximately 2.5% of total employment, Furthermore, over one-third of tipped employees earn such low wages that they are already exempt from federal income tax. The specifics of how this proposal would be implemented remain unclear.
A pertinent question is whether this exemption would apply solely to income taxes or if it would extend to payroll taxes as well. The removal of taxes on tips could potentially result in unusual consequences. For instance, a tree trimmer who typically charges $500 for his services might adjust his pricing to $300 for the job while anticipating a $200 tip, knowing it would not be subject to taxation. This could lead to an increase in tipping practices in industries where they have not traditionally been prevalent. Additionally, employers might seek to reclassify their employees as tipped workers, thereby reducing their wages to the tipped minimum wage, which is currently set at $2.13 per hour at the federal level. Exempting tips from taxation would create a significant gap in the federal budget, potentially costing an estimated $100 billion over the next decade.
The implications of this alteration would be significant, adversely affecting individuals who are still several years from receiving Social Security benefits. A substantial portion of the taxes collected for Social Security is directly allocated to the Social Security Trust Fund. Therefore, the removal of these taxes would result in a decrease in funding for Social Security.
