Trump’s tax proposals show signs of creating massive deductions for both middle and lower income Americans, by doubling the standard deductions on dependants and protecting write-offs for both homeownership and charitable gifts. This, in turn, should allow more Americans to diminish their tax bracket and retain more of their earnings, enabling them to spend far more money on goods and services, which should bolster the nation’s economy.
As it stands, the standard deduction provision allotted under the current tax code is a fixed amount taxpayer subtract from their income if they choose not to itemize write-offs such as mortgage interest, charitable donations, local taxes and other items as listed on Schedule A of the tax code. The provision dates back to 1944, during a time of great financial instability amidst World War II, ultimately forcing congress to simplify filing in order to broaden the income tax from a “class tax” to a “mass tax that enabled the country to finance military actions abroad.
The current standard deduction is $6,350 for single taxpayers and $12,700 for married joint filers, with 70% of taxpayers opting to employ the standard deduction as opposed to itemizing solely based upon time constraints that often plague many working Americans. Trump’s proposal, would raise the standard deviation to $12,700 for singles and $25,400 for married joint filler, which according to an estimate by the Tax policy Center could potentially increase the number of taxpayers opting to employ the standard deviation from 70% to 95%. Though this increase will result in a direct loss of tax revenue to the federal government, it greatly simplifies filling for many people by eliminating the unnecessary process that burden fillers when trying to claim deductions. In addition, the IRS should see the bulk of their burden being released come tax season, as the number of itemized deductions and non-transparent write-offs should diminish.
Though the entirety of Trump’s plan has yet to fully be fleshed out amidst partisan gridlock within Congress, some suspect that the proposed measures of Trump tax plan may create inherent winners and losers, with some reaping more benefits than others on account of their demographic region, filling status or extraneous circumstances. In 2016, both Trump and the GOP proposed rescinding the personal exemption tax on dependents, in order to support an increase to the standard deduction. Though Trump’s current proposals do not re-address the matter of personal exemptions, the loss of this tax break might hurt large families if no other alternatives are provided. On the other hand, the drastic increase in the standard deduction may serve to offset the loss for some families, as plans to decrease income tax rates and move up the tax floor might provide families with a much-needed cushion.
In spite of this, President Trump’s proposals might also suggest that write-offs on Schedule A provision might be in jeopardy. As it stands, schedule A enables break for medical expenses; state and local taxes paid; investment interest; casualty losses; gambling losses; and certain employee expenses, among others. However, among these deductions, many fear that state and local taxes might suffer the harsh backlash from Republicans, as the provision primary beneficiaries are those who reside within Democratic-held states such as California, New York, and New jersey. According to the congressional Joint Committee on Taxation, the deduction alone accounts for a $100 billion dollar loss, which is far greater than the mortgage interest deduction used by homeowners.
Yet this tax deduction on state and local taxes creates somewhat of a conundrum amongst policy makers, and the commission would unevenly spread across income classes according to the Alternative Minimum Tax rate imposed nearly 50 years ago as a means of quelling the systemic abuse of tax breaks by the wealthy. According to Mr. Williams, “taxpayers who earn about $200,000 to $1 million a year wouldn’t feel the loss of their state and local tax deductions as much as middle-class taxpayers or very high earners.”
In the end, these are merely speculations based on only a small rendering of Trump’s massive tax proposal. We will still have to wait for congressional committees weighing in and debating the likelihood of such an enormous bill receiving majority support within both chambers of congress. However, given their rather partisan state of both the House and Senate, I wouldn’t guarantee Trump’s proposals are coming anytime soon.