Trump's tax proposal: What it means for the rich and for the world

Some big questions remain about President Donald Trump's tax policy. Photo / AP

President Donald Trump has offered a glimpse into his approach to tax reform, with the White House announcing he wants to reduce rates -- especially on corporations and businesses -- as well as provide new breaks for working-class households and middle-class parents.

But today's release contained no legislative text, or even the kind of detailed outline that policymakers often use to guide discussions of major reforms. Instead, it was a brief statement on how Trump plans to approach a revamp of the tax code, one of the new president's major domestic objectives. And while it offered a few new insights, it left Washington waiting on key details.

Here's what we learned from the document, as well as the big tax questions the White House still hasn't answered.

1. A bigger tax cut for the middle class

During the campaign, President Trump proposed massive tax relief for the wealthy. With this new statement of principles, it appears the White House may be moving in the direction of doing somewhat more for the middle class -- though the details are still unclear.

Currently, households do not pay taxes on a certain minimum amount of income, depending on size and family status. During the campaign, Trump proposed exempting households from paying taxes on their first $15,000 in income, regardless of the type or size of the household. He also proposed bringing the minimum marginal rate that ordinary households pay on their income up from 10 per cent to 12 per cent.

According to the new document, there would be no increase in that minimum rate. Households would be able to avoid taxes on their first $25,200 in income for a married couple (the figure for individual taxpayers would be half that), but on top of that, there could be additional exemptions depending on the size of the household, as in the current system.

The document does not say anything about those personal exemptions, as they are called, and how Trump intends to handle those exemptions is crucial to how his plan will affect ordinary families.

Meanwhile, the uppermost marginal rate -- paid by the most affluent households -- will be 35 per cent, according to this document, as opposed to the 33 per cent that Trump proposed during the campaign. (It is currently just under 40 per cent.)

Another piece of evidence suggesting that Trump and his aides want to do more for working-class taxpayers is that the White House is looking for a new direction on child care.

Trump was the first Republican presidential nominee to propose federal child-care benefits, but his plan was criticized because it would disproportionately help wealthy parents. A senior administration official told The Washington Post Tuesday that Trump's staff is trying to find a way to address those criticisms. Wednesday's document states that child care will be part of Trump's plan, but offers no further details.

2. A bigger tax cut for the rich

The plan is still a boon for the rich, however. Trump would repeal the estate tax, which is levied on the inheritances of the wealthy. The richest 10 per cent of taxpayers are projected to pay 90 per cent of estate taxes this year, according to the nonpartisan Tax Policy Center.

Trump would also repeal a fee on wealthy taxpayers' investments imposed as part of President Obama's health-care reforms, also known as Obamacare. Most economists believe that reducing the rate on corporate income to 15 per cent would mainly benefit those who own stock in those corporations, who tend to be richer.

In all, Trump has so far proposed minor changes to his plan from the campaign. The Tax Policy Center forecast that 51 per cent of the benefits from that plan would eventually accrue to the wealthiest 1 per cent of taxpayers.

3. Will Trump stick to conventional GOP wisdom?

A broader question is not how the plan would affect rich households as opposed to the poor, but what it would mean for the American economy overall.

Many in the Republican Party argue that simply reducing rates is enough to encourage work and investment, since reduced rates imply that taxpayers can keep more of their income. Trump is proposing plenty of reduced rates, bringing them down to 35 per cent for rich individual taxpayers and 15 per cent for corporations and businesses.

Yet some conservative thinkers have argued while reducing rates could be beneficial, they are already very low by historical standards, and other changes to the tax system might be more important for growth. The document published Wednesday does not discuss these new ideas, such as helping taxpayers and firms recover the costs of new investments.

An important caveat is that the document is very brief, and Republican lawmakers will have opportunities to share their ideas about how to stimulate the economy going forward.

4. How will Trump try to bring jobs back from overseas?

Criticism of international trade was paramount in Trump's appeal to voters, but the document released Wednesday does not answer basic questions about whether he would address this issue in terms of taxes.

Trump and his advisers have repeatedly said they support some form of taxation on imports. One possibility is the plan proposed by Republicans in the House, including the speaker, Rep. Paul Ryan, R-Wis., which would tax imports at the regular rate on corporate income.

Currently, companies are allowed to deduct any imports from the income on which they must pay taxes. The Republican proposal is known as a border adjustment.

Another approach would be what Trump has described as a "reciprocal tax," which would aim to match taxes imposed on certain goods in different countries around the world with some corresponding tax in the United States.

The new document offers no information about how imports or exports would be taxed.

5. Is there a big loophole in the plan?

The success of Trump's plan could depend on how successful his aides and Republican staff in the Hill are in avoiding a major loophole that could be created by his plan.

Trump's proposal would open up a major discrepancy between the rate for individual taxpayers (35 per cent in the new document) and the rate for corporations and businesses (the document calls for 15 per cent). That gives individual taxpayers a good reason to claim that they are, in fact, businesses to avoid taxes.

The Tax Policy Center projects that taxpayers exploiting this potential loophole could reduce the taxes the government collects by $2.6 trillion over 20 years. That is more than half as much as the main component of the individual plan, the reduction in rates on ordinary income, forecast to cost $4 trillion over the same period.

Fiscally conservative GOP lawmakers might be reluctant to introduce such a massive loophole, but Trump's allies are betting that they can find a way to prevent the reduced rates on businesses from being abused.