This post was originally published on Forbes Sep 28, 2015
The Donald Trump tax plan is out. Big picture it seems like people who don’t pay much now will pay nothing and everybody will pay a lot less, but it is revenue neutral. I’ll save the scoring part for the people who do that sort of thing. I’ll be very surprised if it turns out to revenue neutral. Here are the high points
1. If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.
2. All other Americans will get a simpler tax code with four brackets – 0%, 10%, 20% and 25% – instead of the current seven. This new tax code eliminates the marriage penalty and the Alternative Minimum Tax (AMT) while providing the lowest tax rate since before World War II.
3. No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world.
4. No family will have to pay the death tax. You earned and saved that money for your family, not the government. You paid taxes on it when you earned it.
This plan simplifies the tax code by taking nearly 50% of current filers off the income tax rolls entirely and reducing the number of tax brackets from seven to four for everyone else.
In the relative scheme of things, more or fewer brackets does not matter very much when it comes to complexity. More significantly reducing the number of filers does not reduce the code’s complexity. Presumably many of them did not have very complicated returns.
The other thing is that many low-income filers are filing in order to get the earned income credit. I just looked at a return whose only income was a W-2 of about $20,000 with one child. The $500 in income tax is nicely taken care of by the child credit and the balance of the child credit and the earned income credit, in effect, create a negative income tax of about $3,000. Does the Trump plan leave the earned income credit in effect? If so, there might not be the dramatic drop in filers claimed. If he is getting rid of the earned income credit, that could be a huge blow to low-income families.
Life insurance is not the investment of choice for the wealthy. There is no opportunity for capital gains and lower tax rates on dividends. If you cash your policy in, you’re taxed at your marginal income tax rate. To get a tax-free benefit, you have to hold it until death. But a tax-free death benefit is no different than the basis step-up that other investments enjoy. So, while inside buildup sounds a great deal, it often pales in comparison to the tax treatment of other investments. Trump’s attack on life insurance inside buildup is also probably overkill: He’s also proposing a repeal of the estate tax, so there would likely be much less of a need for the wealthy to buy life insurance in the first place. Considering that permanent life insurance is one of the safest investments that people can make, it baffles me why it attracts so much negative attention.
No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes.
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