320 Years of History
Gold Member
I penned the content below for a different thread, but I think it's information that a lot of folks are not aware of; therefore I'm reposting it as a thread unto itself. In the remarks below, you'll find some references to supply-side economics. That's because that was the topic of the thread in which it was posted. I wrote the post originally to show the inequity toward the middle class of supply-side economics.
I truly do hope you read the post. I know it's long and I know few folks here are willing to read long posts. The post is written so that non-CPAs/tax specialists can understand it. That's got a lot to do with its length. I'm sorry, but there isn't a way to explain in "140 characters" how the details of Trump's proposal work. I won't be hurt if one doesn't read it; I'm just saying that one should. If you are middle class, it's going to affect how you feel about the nature and fairness of Trump's tax plan and you should understand it in detail for that reason. If upon understanding it, you still feel okay with his proposal, fine.
Looking at Trump's current tax cutting proposals, one cursorily senses from the way his proposal is discussed that at least the proportionality of the cuts would be comparable across all incomes. The fact is, however, that is not that. Trump doesn't propose cut all rates by a given percent. Here's what he proposes.
Brackets & Marginal Tax Rates for Married-Joint filers (Brackets for single filers are ½ of these amounts):
I truly do hope you read the post. I know it's long and I know few folks here are willing to read long posts. The post is written so that non-CPAs/tax specialists can understand it. That's got a lot to do with its length. I'm sorry, but there isn't a way to explain in "140 characters" how the details of Trump's proposal work. I won't be hurt if one doesn't read it; I'm just saying that one should. If you are middle class, it's going to affect how you feel about the nature and fairness of Trump's tax plan and you should understand it in detail for that reason. If upon understanding it, you still feel okay with his proposal, fine.
Looking at Trump's current tax cutting proposals, one cursorily senses from the way his proposal is discussed that at least the proportionality of the cuts would be comparable across all incomes. The fact is, however, that is not that. Trump doesn't propose cut all rates by a given percent. Here's what he proposes.
Brackets & Marginal Tax Rates for Married-Joint filers (Brackets for single filers are ½ of these amounts):
- Less than $75,000 12%
- More than $75,000 but less than $225,000 25%
- More than $225,000 33%
- What is your effective (not marginal) tax rate now? I suspect that it's essentially what he's proposing. I know my marginal rate is higher than his proposed marginal rates, but my effective rate is just a bit shy of what he's proposed for the middle group. So, were I a wage/salaried worker, unless he trashes a bunch of the reductions for which I am eligible, and from what I can tell he's not, my effective tax rate seemingly won't change materially, even though the marginal rate to which I'd ostensibly be subject (the rate applicable to my gross income) is lower. But there's a catch, which I'll discuss a bit later.
To understand what I'm talking about, take a look at what are the current average effective tax rates paid by most folks.
Click on the image to view tables that will show you the average earnings of the folks in each group pictured above. The figures are from 2012, so they will be slightly different for 2015 and 2016, but I think they are close enough for you to get a decent enough sense of what I'm talking about, and unless one is right at the upper or lower ends of a bracket, one is likely in the same bracket now as one was in 2012.
- You'll note (if you clicked on the link) that he'd cap itemized deductions at $200K. What's the impact of that? Folks with predominantly wage and non-business and non-investment income will pay more in federal income tax. Folks with lots of business income and/or investment income either won't see much change at all or they'll realize far lower tax liabilities. Who is that? Doctors, attorneys, investment bankers, reasonably successful small business owners, C-level and and other senior executive corporate employees (most of these folks greatest compensation comes from stock transactions -- capital gains -- not wages), pretty much anyone who earns their income via a partnership or S Corp. (If you don't understand pass through income, click on the link.)
Consider the example of a married couple whose taxable income (after deductions and exemptions currently is $225K -- very solidly a (upper) middle class couple, but not rich by any stretch of the imagination -- for 2016. What would they pay?
-- Currently, they'd pay at 28%
-- Under the Trump plan, they'd pay at 33%. That's a 5% Trump-tax increase!
That's an $11,250 increase in their tax bill. I suspect for most folks in that income range, that's about two or three mortgage payments. So, you tell me. Do you think that sum won't be seriously missed by a couple earning $225? I'll tell you that it without question would be.
Look back at the chart above. What is the effective tax rate paid by couples who have about $40K/year in taxable income? If you clicked on the chart and looked at Table 7, you'd find that puts a $40K/year (after deductions, exemptions and credits) earner in the top 25% and they currently pay at an effective tax rate of ~7.25 to ~10% even though their marginal rate is 15% and Trump offers a 12% marginal rate.
Now here's the catch for modest earners....If that couple's deduction profile (the deductions they are eligible to take and do take) is no different than it is under the current tax plan -- and those are details we have not been given -- all that'll change is their marginal rate -- the starting rate before deductions, credits and exemptions are calculated, not the actual rate at which they'll pay taxes.
- The Inequity "Catch" that Benefits High Income Folks:
Remember the catch I mentioned earlier? Let's now look at doctors, attorneys, accountants, architects, engineering partners, advertising firm partners, many management consultants, pretty much anyone who's self-employed and doing well -- folks in the ~$400K+ per year range. Since their earned income from practicing medicine will likely flow to them via a pass through entity, that is, an S Corp, LLC or partnership, their earnings received that way will be taxed at...wait for it...15%!
That's not the end of it. Ostensibly, Trump's tax plan appears to have a vendetta to bring against hedge fund and private equity fund managers for he proposes eliminating the carried-interest (interest as in "stake," not interest on money) preference and taxing that kind of income at the ordinary income rate of 33% instead of the current 20%.
That sounds good, but there's a detail that's been left unclarified. What do you think that is? It's that private equity firms and hedge funds are often pass through entities, and Trump's plan is silent on whether that form of business organization would be denied to the partners of such entities. I happen to think that there is no way the folks who are among the richest of the rich are going to let Congress pass legislation that denies them access to the pass through entity provision I just discussed above and foists upon them a 13% marginal tax rate increase that they'll have to work all the harder to deduct down to whatever single-digit to low-teen rates they pay at today. That said, there are still ways around it, not the least of which is to take advantage of the "10% repatriation" provision Trump has proposed. (Note: Either of the last two strategies I mentioned require setting up shell companies -- a la Apple, Google and others -- that exist in name only.)
