Why the Trump tax cut may not deliver the boost White House says
WASHINGTON- President Donald Trump's team boasted Wednesday that its tax-cut plan would lighten Americans' financial burdens, ignite economic growth and vastly simplify tax filing.
Yet the proposal so far remains short of vital details, including how it would be paid for. And based on the few specifics spelled out so far, most experts suggest that it would add little to growth while swelling the budget deficit and potentially handing large windfalls to wealthier taxpayers.
Trump's plan would replace the current seven income tax brackets with three, and the top bracket would drop from 39.6 percent to 35 percent. It would also slash the corporate rate from 35 percent all the way to 15 percent, a boon to most companies even though many don't pay the full tax now. With tax credits and other loopholes, most corporations pay closer to 20 percent, according to calculations by JPMorgan.
Perhaps the most contentious plank would enable taxpayers with business income - including those wealthy enough to pay the top tax rate - to instead pay the new 15 percent corporate rate. That's because Trump would apply the corporate rate to "pass through" businesses. Pass-throughs include partnerships such as law firms and hedge funds as well as most small businesses - from the local florist to the family-owned restaurant on Main Street.
What's more, some privately held large companies - including Trump's own real estate empire - are structured as pass-throughs and would benefit, too.
Here's a closer look at Trump's proposal and its likely impact:
___
WHO BENEFITS?
It's hard to say because the administration has released so few details. The three new income tax rates would be 10 percent, 25 percent and 35 percent. But Trump's top economic adviser, Gary Cohn, and Treasury Secretary Steven Mnuchin, weren't ready Wednesday to say at what income levels these new rates would kick in.
Tax experts said far more details were needed to determine how average Americans would be affected.
"The impact on Joe Taxpayer is unknown," said Marc Gerson, vice chair of the tax department of law firm Miller & Chevalier in Washington. "There's not enough specificity. It's hard for taxpayers to determine where they'll come out."
Cohn asserted that the plan would cut taxes "especially for low and middle income families." It purports to do so in part by doubling the standard deduction, which is used by taxpayers who don't itemize their tax deductions.
At the same time, the Trump plan would eliminate the estate tax and the alternative minimum tax, thereby benefiting some of the richest taxpayers. And that's on top of shrinking the corporate tax rate that many affluent individuals could likely capitalize on.
___
WHY CUT CORPORATE TAXES?
By making corporations more profitable, the Trump administration hopes to encourage more business spending on equipment - from computers to factories and machinery.
Doing so, in turn, could make the economy more efficient and accelerate growth and hiring. Economic growth has been stuck at about 2 percent a year since the recession ended in 2009. Mnuchin says the administration wants to accelerate it above 3 percent, a pace it hasn't touched since 2005.
The corporate tax cuts are also intended to encourage more businesses to stay in the United States, which now has the highest corporate rate among advanced economies.
Many large corporations are enthusiastic about lower rates and say they support the elimination of loopholes, which both reduce revenue and make taxes more complicated.
___
WHO'D BENEFIT FROM THE CORPORATE RATE CUT?
Aside from most large companies, many partnerships and small businesses would benefit because they're structured as pass-throughs, which derives from the fact that they pass on their profits to their owners.
Those owners now pay individual income tax rates, which top out at 39.6 percent. With the pass-through rate dropped to 15 percent, those taxpayers could enjoy an enormous tax cut.
The Trump team stressed the benefits that might flow to small businesses. But the richest windfalls would flow to the wealthy - lawyers, hedge fund managers, consultants and other big earners. Nearly 75 percent of pass-through income flows to the 10 percent wealthiest taxpayers, according to the liberal Center on Budget and Policy Priorities.
"It would tremendously help high earners," says Brian Thompson, a certified public accountant in Chicago.
In Kansas, Gov. Sam Brownback eliminated state taxes on pass-throughs, which turned out to be a boon for Bill Self, the coach of the University of Kansas' men's basketball team. He had previously set up his own company, according to state media reports. As a result, he paid little state income tax despite earning nearly $3 million a year.
UPDATED: Please read and follow our commenting policy: