By Yuqi Wang, Policy Analyst, Economic Policy Project, NCLR
In an attempt to squeak in a policy win during his first 100 days, President Trump released a tax reform outline this week. Unfortunately, the big tax reform reveal was simply a one-page outline that was thin on details. The little content that was shared makes it clear that the president plans to line the pockets of the rich and provide very little support to working families. The tax reform outline also runs directly counter to the Trump administration’s pre-election promises about tax reform—that reform would not reduce revenues, not cut taxes for the wealthy, and benefit working families.
The proposal places too much emphasis on rewarding the wealthy and corporations. Plus, there’s no way to pay for it, which means we’re looking at either a very large increase in the national debt, or huge reductions in federal spending, neither of which benefits middle-class workers.
The plan would:
- Benefit high-income earners. The current seven tax brackets will be streamlined to three—10%, 25%, and 35%—which means that the top individual income tax rate will drop from 39.6% to 35%. The Tax Policy Center estimated the top 1% of households would see a 14% increase in after-tax income, while middle-class Americans would see gains of just 1.2% to 1.8%. In addition, a 3.8% tax on the investment income of higher income households, which helps fund the Affordable Care Act coverage of 20 million Americans, would vanish.
- Cut the corporate tax rate from 35% to 15%. Cutting the corporate tax rate is costly. President Trump’s proposal to reduce the corporate tax rate to 15% would cost more than $2 trillion over 10 years, according to the Tax Policy Center. This is equal to $240 billion per year, almost as much as what the federal government spent in 2016 on SNAP, unemployment benefits, and child nutrition.
- Eliminate the estate tax. The richest 10% of taxpayers are projected to pay for 90% of estate taxes this year. Repealing the tax benefits wealthy heirs while eliminating an estimated $19.7 billion in tax revenue.
As with all of Trump’s grand proposals during his first 100 days, there are few details—and the details matter.
Next it will be Congress’s turn to respond to this outline. As Congress considers rewriting the tax code, they should remember that it has long been thought to be an instrument to promote economic mobility and asset-building among low- and middle-income Americans. Yet the tax system remains acutely burdensome to workers at the bottom of the income distribution, including many Hispanic workers.
For tax reform to truly benefit middle-class working families, it should:
- Expand the earned income tax credit (EITC). The EITC helped more than 26 million families make ends meet in 2016 by increasing the earnings of lower-income workers and reducing child poverty. More workers should be benefit from the EITC by expanding it to include workers not raising children.
- Change the mortgage interest deduction (MID) to a tax credit. The Trump administration’s proposal keeps the MID intact. However, most of the benefits of this subsidy accrue to upper-income households—taxpayers with incomes of $100,000 or more received 77% of the total benefit in 2011. One potential reform is changing the MID from a deduction to a credit, with a cap on the maximum amount of interest it covers.
- Make the retirement savings contributions tax credit (saver’s tax credit) refundable. This credit is designed to help low- and middle-income workers save for retirement, but half of all workers—and two-thirds of Hispanic workers—do not have access to employer-sponsored retirement plans and largely do not benefit from this tax credit. The Saver’s Credit should be redesigned to be refundable.
Rather than focusing on the needs of the average American, President Trump’s proposal puts the needs of the wealthy and corporations first. We hope Congress is better prepared to show the American middle-class a tax reform plan that reduces poverty, raises revenue to build a strong economy, and invests in our future.