Tax reforms were a key promise of Trump’s campaign. It seems the president has been busy working on these reforms and on Wednesday morning, Trump tweeted that no president had ever accomplished what he did in the 9 months since his inauguration.
Interestingly though, the tweet came just a few hours before the latest Republican tax proposal was announced. Although Trump has been talking a lot about massive tax cuts, he is not the first president who has tried to make such changes in the tax system a few months into office.
After only 5 months in office, George W. Bush had a tax reform proposal which received substantive bipartisan support from both sides of the political divide. Bush’s tax reform is still pretty much part of the tax laws today.
However, analysts argue that unlike Trump and House Speaker Paul Ryan, Bush understood the underlying politics of tax reforms. It was because of this understanding that those reforms sailed through and still remain.
Trump’s political inexperience in tax reform matters could be a ticking time bomb. It’s likely that the new proposal by the Republicans will blow up in their faces sooner than we think.
So the big question is why?
Well, for starters, tax reforms can only gain popularity if they don’t increase taxes on people. For George Bush, the key message during tax reforms under his administration was simple, “These reforms will not increase income tax on Americans.”
The Bush plan also looked to lower the marginal tax rate for low-income parents and also went on to increase tax benefits for families with children under the child tax credit plan. High-income earners too were reprieved in the plan. The proposal looked to reduce taxes on high-income earners from 39.6% to 33%. Although finally the rate was set at 35%, it was still a reduction.
At the time, Congress passed this proposal which appeared to benefit everyone. It proposed tax cuts on all levels of society but more emphasis was placed on maximizing the tax benefits for middle-income earners.
However, Trump’s proposal is looking to do the opposite. The plan will raise taxes for middle-income earners in the US while implementing cuts for the rich. According to the proposal, there will be three income tax brackets - 12%, 25%, and 35%.
The details of the proposal are yet to be filed so we don’t know which income levels will be affected by the three brackets. However, the proposal also looks to abolish the $4,050 tax exemption for each department child. The program will be replaced by an increase in the per-child credit program that has not yet been specified. It’s likely that moderate to upper-moderate earners who have itemized deductions will see tax increases.
The proposal will abolish itemized deductions such as mortgage interest as well as local and state taxes. Although Republicans have said that they plan to double the standard deduction, this is very misleading. Itemizing taxpayers will not be able to take personal exemptions and this will expose them to an increase in income tax of up to $8,100.
As for the rich, things are not that bad. While the proposal still maintains a 35% tax on high-income workers, a new preferential business income tax rate for business owners could see taxes on profits capped at 25%. Corporate income tax is also expected to be reduced, benefiting wealthy people who own the lion’s share of stocks.
The proposal seems to deviate completely from former president George Bush’s plan which was to convince everyone that they wouldn’t lose out in the new tax regime. Trump’s proposal is looking to take away income from middle-income earners while rewarding the wealthy. While more details of the plan are yet to come out, this will be a huge hurdle to overcome.