Trump’s Upside-Down Plan: Tax Cuts Come at the Expense of Working Families

Posted by Chad Bolt and David Newville on April 28, 2017

This past Wednesday, President Donald Trump released a one-page outline of a tax plan that he says provides tax relief for the middle class, but in reality, the plan is basically a massive tax cut for the rich.

Don’t be fooled: like the American Health Care Act, which actually was also a massive tax cut for the wealthy disguised as health care reform, this plan is also a massive tax cut for people who need it the least. This time, it is merely disguised as “tax relief” and “simplification.”

For starters, the plan consolidates the income tax brackets from seven to three, but in doing so, it conveniently lowers the top tax rate for the wealthiest Americans by nearly 5 percent. It does raise the standard deduction—currently $12,600 for couples—to $24,000, but for low-income families that have no tax liability, raising the standard deduction does absolutely nothing to help them get ahead.

Even for middle-class families that may normally itemize, this might sound like good news on its own. But the trade off? The plan eliminates every single deduction in the tax code except for the charitable giving deduction and the mortgage interest deduction. The mortgage interest deduction alone costs the government over $60 billion every year, but to subsidize debt—not homeownership—including on second homes and even yachts. Of all the credits to preserve, this one is particularly problematic in that its benefits flow almost exclusively to the wealthiest households.

In another major giveaway to the wealthiest Americans, the plan slashes the corporate tax rate from 35 to 15 percent. In a significant change from current law, it also cuts the tax rate on so-called “pass-throughs”—business income on which individual tax is paid—to the same 15 percent rate. Pass-throughs are often thought of as small businesses, but in reality, hedge funds, law firms, and real estate companies often function as pass-throughs. In fact, 70 percent of this type of income goes to the top 1 percent of U.S. households. In other words, this change would create a massive new tax loophole for many wealthy taxpayers to completely avoid even the new lower individual tax rates.

Two other features of the plan benefit the wealthiest Americans exclusively. The first is the repeal of the estate tax—one of the most progressive features of the tax code—which currently only applies to estates worth over $5.3 million. The second is a recycled trick from the American Health Care Act: the repeal of the 3.8 percent investment income surtax that is also borne only by the wealthiest households.

An analysis of a similar version of this plan revealed it would cost $2.4 trillion over 10 years. That is a significant loss of revenue that would make it even more difficult to invest in education and housing, repair roads and bridges, and ensure quality child care—all to give another tax break to millionaires and billionaires. The administration somehow claims these tax cuts will “pay for themselves,” but they have not offered any credible analysis to back this claim.

If the administration truly wanted to help working families—which it consistently asserted throughout the campaign—it would reform the wealth-building subsidies in the tax code to make sure families who need the most help get the most help. The government spends over $600 billion every year helping Americans save for college, buy a home, and build retirement security. The problem is that this spending is upside down; it only helps families that are already wealthy, and does almost nothing to help working families get ahead. What we should be doing instead is turning this spending right-side up.

In addition to expanding provisions like the Earned Income Tax Credit that have a proven track record of successfully lifting families out of poverty, wealth-building tax breaks should be preserved and reformed so that they actually give a boost to the families who need it most, not thrown out as part of a “tax reform” plan that is all about helping the wealthy. One immediate way to do this would be to truly reform the mortgage interest deduction so it actually helps more Americans buy homes, rather than just helping the wealthy pay their mortgages.

The American people have already rejected the Trump administration’s plan to cut taxes for the wealthy once, through the failure of the American Health Care Act. The administration should abandon its tired obsession with tax cuts for the rich and instead put forth a serious plan that reforms the tax code so that it works for working families.

(Image: Metropolico.org, via flickr, CC BY-SA 2.0)

About the author more »

Chad Bolt is a Legislative Analyst for CFED. David Newville is the Director of Federal Policy for CFED.

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