The Single Biggest Lie of Trump’s Tax Plan

Lies
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I’ve been a consumer reporter for 26 years and a CPA for 36, so I’ve followed a few tax discussions and debates. Many past proposals stretched credulity, like radical tax simplification (Taxes so simple, you’ll do them on a postcard!) which I first reported on in 1998 and is now again under consideration.

Then there’s the idea of eliminating the IRS entirely by replacing income taxes with a national sales tax. This was also proposed 20 years ago and still surfaces today.

The current Trump Tax Plan is another example of a tax proposal that simply doesn’t ring true. President Donald Trump has been saying, literally for years, that his plan won’t benefit the rich — it’s all about the little guy. As you’ll soon see, however, not only does it benefit the rich, it benefits at least one very rich person quite handsomely.

What Trump has said

Let’s start with a few statements our president has made regarding his plan.

Sept. 28, 2015:

It’s going to cost me a fortune, which is actually true.

July 25, 2017:

The truth is the people I care most about are the middle-income people in this country who have gotten screwed. And if there’s upward revision it’s going to be on high-income people.

Aug. 30, 2017:

And I’m speaking against myself when I do this, I have to tell you … It’s crazy. Maybe we shouldn’t be doing this, you know. But we’re doing the right thing.

Sept. 13, 2017:

The rich will not be gaining at all with this plan. I think the wealthy will be pretty much where they are.

Is President Trump telling the truth when he says his tax plan will cost rich guys like him a fortune? You can quickly decide this for yourself. (If numbers make your eyes glaze over, don’t worry. This is math a fifth-grader can do.)

Tax reform is currently under debate, so there’s no way to know what the final plan will look like. The assumptions below are based on what Trump has published and echoed while pushing his plan.

Higher taxes for the rich?

Assume you’re a billionaire real estate developer with an annual income of $200 million and you’re filing a joint tax return. Your income is derived from a bunch of partnerships, limited liability companies and other so-called “pass-through” entities, meaning their profit is taxed at your personal tax rate.

Currently you’ll pay about 40 percent of all your income over $470,700 in income taxes. So if you make $200 million, you’re paying 40 percent on practically all — 98 percent — of your income. Your total tax bill? Call it $80 million: 40 percent of $200 million.

Now let’s assume that Congress lowers the rate for businesses like yours to 15 percent, which is exactly what President Trump is proposing. Result? Instead of paying $80 million in federal income taxes, you’ll pay $30 million: 15 percent of $200 million.

You just saved an astonishing $50 million annually.

Eliminating the estate tax

Eliminating estate taxes has long been a goal of many Republicans, and it is a central feature of the Trump Tax Plan.

For 2017, the estate tax effectively applies to individual estates over $5.49 million. If you’re a married couple, that means you can die with an estate worth about $11 million and pay no federal estate tax. In addition, there are lots of strategies out there, some simple, some sophisticated, to avoid or reduce the tax.

That being said, our hypothetical billionaire developer would be very happy if the estate tax were eliminated. If you’re worth, say, $10 billion, you could end up saving another $4 billion.

So here’s a simple question: Is the Trump Tax Plan going to cost our hypothetical developer a fortune, or make him and his heirs a much, much bigger one?

What about closing loopholes for the rich?

The Trump Tax Plan suggests it will partially pay for itself by “reducing or eliminating deductions and loopholes available to the very rich, starting by steepening the curve of the Personal Exemption Phaseout and the Pease Limitation on itemized deductions.”

OK, let’s take a closer look.

The personal exemption amount — essentially a deduction — for joint filers is currently $4,050 per household member. If our developer has a wife and one child living at home, that means he’d get to reduce his taxable income by $4,030 multiplied by 3, or $12,150.

But here’s the rub: Under the current system, personal exemptions are already eliminated for taxpayers with an adjusted gross income exceeding $436,300, so our man isn’t currently getting that break anyway.

The Pease Limitation currently reduces itemized deductions (charitable contributions, mortgage Interest, state, local and property taxes, etc.) for joint filers reporting income exceeding $313,800. Let’s say we “steepen the curve” of the Pease Limitation to the extent that itemized deductions are eliminated entirely for “the very rich.” Will that cause a little pain? Perhaps, but not relative to gaining $50 million in income tax savings and billions in estate tax savings.

Of course, there are those among the super rich who get their income not from self-employment, like our developer, but from a salary. Alas, they won’t be able to avail themselves of the 15 percent tax rate. They’ll have to console themselves with a rate of somewhere between 25 percent, which Trump originally proposed as the top bracket, and 35 percent, which has been bandied about more recently.

If itemized deductions are eliminated, our salaried rich person could theoretically find themselves paying more in income taxes. Should that occur, however, they might consider quitting their job, forming a company qualified for the 15 percent tax rate, then selling that new company’s consulting services back to their former employer. At least, that’s what I’d do.

Is it that simple?

This is an exceedingly simple look at something that’s both complex and has yet to be detailed, much less agreed on. Also true: Trump’s plan may reduce the tax burden of average Americans. But as a decades-long veteran of suggested and enacted tax policies, I can’t in good conscience not point out the obvious: If adopted, the tax plan currently being pushed by the Trump administration would be a dream come true for many of the richest Americans.

Anyone who says anything else is simply not telling the truth.

How would you like to see the tax system changed? Share with us in comments below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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