Debunking the Myths on the Trump Tax Plan

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There have been plenty of attacks against the tax plan proposed by President Trump. I personally love the tax plan as it is everything you could want. Realistic taxes for the rich and corporations. Lower taxes on the poor and middle class. Best of all the new tax code is simple and easy to use as it pushes everyone to use standardized deductions. It’s no wonder tax attorneys and accountants are against it. They would lose a lot of business as people begin using standardized deductions.

There are two main arguments people use when they claim they are against the tax reform proposed by Trump. First that it would blow up the deficit. Second only the very wealthy would benefit from the tax cut.

The Tax Cut Will Increase the Deficit

When discussing how the tax cut will affect the deficit we have to take a look at how the taxes collected are calculated. Whenever any analysis is done on this point people assume that the figures presented are gospel truth and base everything on that. There are two main problems with how the figures are calculated.

The first major problem is it assumes there are no deductions and other loopholes and that everyone paid the statutory tax rates. Whenever business leaders on the left discuss the tax cuts they always say that the tax rate is not as high as you would think like Warren Buffet for example in his recent interview. The document detailing the differences in tax collection are almost always prepared by tax attorneys and accountants as well. People who make a living finding and maximizing these deductions. According to the Wall Street Journal the actual tax rate is 24%. The GAO says around 12-16%. The amount should be in the middle of that. Calculating your collection based on 35% is dishonest and does not present a clear picture. If companies actually paid that there would be none left registered in the US.

The second major problem with their numbers is that it takes income tax by itself. Economists have a phrase called “ceteris paribus” to hand wave away all variables they do not want to deal with. In the report by the Tax Policy Center they specifically mention that they do not take any other macroeconomic effects into consideration. The concept may have some uses but it distorts what is actually happening with this tax cut. When you are given a tax cut you do not use it to swim around in a pool of Trump bucks like Scrooge Mcduck. You would use the money. It would most likely be used to buy other things which would generate sales or other local taxes. You could invest it if you have nothing to buy which would then generate capital gains tax. You could deposit it into a bank allowing them to lend out more money. Almost everything you can do with the money that is not taken from you would be taxed after you use it in some shape, way, or form. This would make up for any shortfall in collection from income taxes. After all nothing states that all the funds of the government must come from income taxes. If you have ever heard anyone argue for giving a stimulus to boost the economy the exact same arguments would apply.

The Tax Cut is For the Rich

There are two things people refer to when they state this. First the tax brackets for the rich when it comes to personal income taxes and next the corporate income taxes dropping down from 35 to 15%.

I will go with the corporate tax argument first as it is easier to explain. As I explained earlier numerous sources respected by the left from Warren Buffet to various publications have stated that the actual tax rate is not 35%. Moving the tax bracket from 12% to 15% or 20% to 15% does not sound as controversial does it? That is not the entire picture though. When companies pay taxes the companies that can scale to afford excellent tax lawyers invariably end up paying lower taxes while those who can only afford turbotax or do their own pay higher taxes. Aside from the tax rates not being what is advertised it ends up being higher for smaller companies than it is for larger ones. Reducing the rate and then removing deductions means that all companies pay the same rate. This actually hurts the rich companies and helps the poor ones.

On to personal income taxes. The defining characteristic of the tax plan is that it pushes almost everyone to take standardized deductions. If you wanted a tax plan to benefit the poor and middle class this would be how you do it. As a general rule the poorer someone is the better standardized deductions are for him. Those with lower incomes would not have the disposable income necessary to have plenty of deductions nor would they be able to avail of services of an accountant to find all the deductions that they could benefit from.

In 2016 75% of people filing income taxes decided to use the standardized deduction because it is more than what they would by itemizing. President Trump would more than double this deduction in his tax plan which means everyone gets more than double the deductions. In contrast the highest earners rely almost exclusively on deductions to get their taxes down. Most of the deductions are going away under the Trump tax plan. Just removing the SALT (state and local tax) deduction alone would remove a lot of the deductions high income earners use. Add the fact that President Trump is also proposing a limit on the amount of deductions of 100000 on single and 200000 on jointly filed taxes and the case that the tax cut is favorable to the rich is harder to make. Of course this will never get discussed as the media will only discuss the changes to the raw tax rates. My personal fear is the reverse might be true. Removing the deductions and placing a hard limit on the amount that can be claimed may cause the wealthy to flee the country like that French actor who took Belgian citizenship to avoid a tax hike.

Once you take a look at the entire plan it is both very fair and remarkably simple. I encourage everyone to take a look at the tax code themselves instead of relying on media or “the experts”. Remember they need the tax code to be complex or they would not be able to charge a high amount for their services.

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