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Trump’s “Tax Reform” Scam

March 17, 2017

irs

Everybody hates paying taxes, right? And it seems that the richer people get, the more they hate it and the more they want to shift the burden to the non-rich. So now we have in the White House (except on weekends) the richest president we’ve ever had, and he wants to give the richest among us–including himself–enormous tax breaks. What follows gets fairly wonkish, but stick with me because it’s really important to understand what’s at stake.

Let’s start with the Estate Tax, because it’s the easiest to understand. Republicans have long made it the bogeyman of taxes, ominously calling it the “Death Tax”, and Trump has vowed to eliminate it. But for most people in this country–99.8 percent to be exact–the estate tax is ABSOLUTELY IRRELEVANT because their estates are not big enough for it to be applied. You would have to have an estate worth more than $5,450,000 (or $10,900,000 for a married couple) for it to even apply, and an estate worth up to that figure can be passed on to your heirs completely tax-free. So unless you’re really, really rich, you should worry about something else.

Even people with enormous wealth can bequeath most of their estates to their heirs–all of the amount below the figure where the tax kicks in plus 60 percent of the amount above that. Most of estate funds subject to the tax are actually from unrealized capital gains that have never been taxed. The mythical family farm or small business supposedly destroyed by the Estate Tax turns out to be a veritable unicorn. In practice, the very wealthy have come up with legal stratagems to avoid paying much of the tax. Even so, the Congressional Budget Office estimates that the Estate Tax would generate $275 billion over the next 10 years. As the non-partisan Center for Budget and Policy Priorities points out, that’s less 1 percent of federal revenue, but still “significantly more than the federal government will spend on the Food and Drug Administration, the Centers for Disease Control and Prevention, and the Environmental Protection Agency combined.” And that was before their budgets got chopped by the Trump Administration.

Trump whines that the Estate Tax is so unfair.  Bloomberg News calculates that abolishing the tax would save the Trump estate some $564 million (based on an estimated net worth of $3 billion–which is considerably less that the $10 billion Trump has claimed). His wealthy cabinet and their families would also make out like bandits. Bloomberg estimates that Betsy DeVos’s father-in-law might save $900 million!

The estate tax just happens once, so let’s talk about two big changes that Trump wants to make that would happen every tax year.

The first is eliminating the Alternative Minimum Tax.  Most of us mere mortals never have to pay attention to this because our incomes and claimed deductions aren’t large enough for it to kick in. The AMT limits certain deductions and adds back the amount to taxable income. It is specifically designed to keep very rich people from being able to get away with paying virtually nothing in taxes.

Let’s take Trump’s just revealed form 1040 for the year 2005 as an example. The elimination of the AMT would have reduced his effective tax rate to about 4 percent–saving him 80 percent of his tax bill for 2005. Easy to see why he’d love to get rid of the AMT.

The other pillar of Trump’s tax “reform” is to reduce the maximum marginal tax rate from the current 39.6 percent to 33 percent. Bear in mind that this maximum rate only applies to taxable income in excess of a certain amount ($466,950 for a married couple filing jointly). Income below that amount is taxed at progressively lower rates. Reducing this top tax rate would theoretically mean that Couple A who earned $200 million would be taxed at the same current rate as Couple B that earned $200,000. In actual fact, even if the AMT were still in place, Couple A would probably be taxed at a considerably lower rate because much of their income would be from capital gains or other sheltered sources rather than salaries.

According to the Urban Institute/Brooking’s Tax Policy Center, the Trump tax plan would cut the annual taxes of the top 0.1 percent (those with incomes over $3.7 million) by about $1.1 million or about 14 percent of their after-tax income. By contrast, a household in the middle fifth of income levels would get an average tax cut of $1010 (about 1.8 percent of after-tax income), and the poorest fifth would get a measly $110 tax break.

This, in a nutshell, is the Trump tax “reform” strategy:  Throw a few crumbs to average Joe Shmoe in Ohio, who won’t notice that the rich are making off with the rest of the cake.

Of course, if everyone gets a tax cut and the rich get a really big tax cut, then as night follows day this means that government revenues will shrink bigly. The Trump team fantasizes that a resulting miraculous spurt in economic growth will compensate for the loss of revenue because the lower tax rates will be applied to a larger economy, but this has never actually happened.

The effect of the tax “reform” on the budget and deficit is a separate (and obviously related) topic, but basically two things can happen:  1) the deficit will balloon (which is exactly what happened when W. cut taxes and then started a war), or 2) the non-military part of the federal government will be cut drastically (which is precisely what the Trump administration is proposing).  Or more likely, it will be a combination of both.

The Republicans’ wet dream has always been to kill off the social safety net and other non-military sectors of the federal government by starving it of revenue. Now they see their chance to militarize the government by pouring funds into defense and homeland security while privatizing everything else. Where in history have we seen this sort of thing before?

 

 

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