First and foremost, Trump’s income tax reform is a simplification: he wants to cut down the number of tax bands from seven to three. But simplifying is not necessarily the same as reducing taxes. As this graph demonstrates, some taxpayers would definitely benefit from Trump’s tax reform – especially those at the higher end of the income scale. There are others, however, who would see their tax rates go up. Especially those on lower incomes.
The current income tax bands range from 10% and 15% at the lower end of the scale over 25%, 28%, 33% and 35% in the middle to the top band of 40%. Under the Trump plan, only three tax bands would remain: 12%, 25% and 33%.
This would be good news for everyone currently in the top two brackets (35% and 40%). These taxpayers would see their effective rate drop down to 33%, by 2 and 7 percentage points respectively. Conversely, the simplification would bad news for the taxpayers in the lowest bracket (10%). These would see their effective tax rate go up by 2 percentage points, to 12%.
But even in the middle, where many would stay in the same bands as before (25% and 33%), there would be losers as well as winners. Most people in the 15% bracket would drop down to a 12% rate. But a tiny sliver of top earners in this bracket (earning between $37,500 and $37,650) would have the misfortune of seeing their effective tax rate go up by 10 percentage points, to 25%.
A similar thing would happen to the old 28% bracket: taxpayers with incomes between $91,150 and $112,500 would drop three percentage points to 25%, while those between $112,500 and $190,150 would see their tax rate go up 5 percentage points to 33%.
All income amounts quoted here apply to single filers (left side of the graph); but the graph also shows the changes for joint filers (on the right). The calculation is pretty easy – double the amounts for the single filers.
The graph does not take into account other aspects of the Trump tax plan not directly related to the changes to income tax bands, such as the increase of standard deductions and a cap on itemized deductions, although of course these would also have an impact on net incomes.
How about everybody pays the same rate straight across the board?
Everyone paying the same seems fair to me with different rates for different people being a bit on the class warfare side of things.
At least IMO.
Anon….you just don’t get it. A straight flat tax would screw all the wealthy and Corp’s that hire expensive lawyers and accountants to find and insert those loopholes that reduce/eliminate tax burdens.
Also, this should necessitate reducing the IRS head count – that is a No-No.
Wake up and smell the coffee.
Flat tax works everywhere it’s actually tried. Though it would put a lot of tax accountants and lawyers out of work, not to mention lobbyists and other political hacks in the DC beltway orbit, which is why it will NEVER happen.
Taxing earned income has always seemed counterproductive. If someone is willing to pay you to do something, be it grow food, build you a new kitchen, make a movie or any of the million other things people do, then you have to be adding value to the economy or your job will disappear or have its compensation cut.
Its interesting that, at about the same time the income tax was being dreamed up, the self taught economist, Henry George, proposed a single tax… on land. As he saw it, just because the Southern Pacific railroad decided to put a stop in your town, the soaring value of your land was not due to your hard work or shrewd investment but simply your good fortune. We see the same situation happen today when a new highway, airport, mall is built or if Ford or Microsoft builds a new factory or corporate HQ on land near yours.
Capturing unearned capital gains might seem a better way to finance government’s social spending and concentrate the minds of the super rich on whether entitlement spending on parasites is a good idea.
Let’s see how the 12-19-2016 (s)election goes before we go tallying up how we benefit.
The $37650 case is misleading because they only pay extra on the $150 between $37500 and $37650.
They pay less on the bulk from $9275 to $37500.
Total tax for $37650 income:
Old : $5183.75
New : $4537.50
Edit: unless the proposal is to move away from the marginal brackets currently used?
No you are correct. And I believe most of the lowest income bracket will have a benefit of a higher standard deduction to offset the higher tax rate. Not in every case (for example losing exemptions for kids, no more head of household category) but this should be mentioned in any article that says the poor are getting the shaft. Also I believe the “rich” are getting a cap on their itemized deductions. This will offset much of the benefit of the lower marginal top rate. Just my 2/100 of a fiat dollar.
And one more thing: nowhere on the graph or in the commentary does it mention we are talking about “taxable income” – also a bit misleading because it looks like the poor are really getting the shaft.
From:
“Under Trump’s plan, the standard deduction will be increased. This is the flat amount of money that tax filers can deduct from their return each year rather than taking itemized deductions.
This is how the standard deduction system is currently set up:
Filing Status Standard Deduction
Single $6,300
Joint $12,600
Head of Household $9,300
Personal Exemption $4,050
Trump will substantially raise the standard deduction for single and joint filers but eliminate the head of household filing status. The new standard deductions will be:
Filing Status Standard Deduction
Single $15,000
Joint $30,000
As part of a plan to simplify the tax-filing process, Trump hopes more people will take the standard deduction rather than utilizing itemized deductions. Trump will also cap itemized deductions at $200,000 for joint filers and $100,000 for single filers.”
Leaving out the elimination of deductions is leaving out half of the plan. I haven’t followed the latest permutations of his plan, but his initial plan was to allow only deductions for (limited) mortgage interest and charitable contributions. So he’d eliminate deductions for state and local income taxes, real estate taxes, “other taxes” (on schedule A). That would hurt high tax states and help low tax states. In other words, the federal tax code would no longer effectively subsidize the profligacy of states. His plan would incent states to cut spending. Smart.