Who are the winners and losers in Trump's tax plan?

Last Updated Apr 26, 2017 9:36 PM EDT

Who would come out ahead and who would be left behind if President Donald Trump's tax plan were enacted as is? The outline the Trump administration unveiled Wednesday would tilt the tax code toward investors and businesses. The impact on individual taxpayers is also positive, although wealthier ones likely would make out far better. But the effect on future taxpayers from a possibly higher federal deficit isn't encouraging, to say the least. 

The tax plan that Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn rolled out Wednesday would lower the corporate tax rate to 15 percent from 35 percent. The current rate is the highest in the industrialized world and has led to an exodus of U.S. companies to lower-tax nations. 

In addition, the plan would also apply a 15 percent rate to "pass-through" businesses, whose owners now pay individual income tax rates that range as high as 39.6 percent yearly. These entities include everything from barber shops to hedge funds -- and also real estate firms like the Trump Organization, which is Mr. Trump's property vehicle. 

The Trump tax plan is very similar to his proposal during the 2016 election campaign. But what was floated on Wednesday is light on the details and didn't include much on individual tax provisions or how to pay for the cuts. 

The president doesn't look kindly on the big revenue-raiser proposed by House Speaker Paul Ryan (R.-Wisconsin), called a border adjustment tax, which would tax imports and not exports. This would raise $1.1 trillion over 10 years, the Tax Foundation estimates, and would go far toward bridging the budgetary gap that the tax reductions would open.  

Whatever happens to the president's tax plan will depend on whether he can keep intact GOP majorities in the House and Senate. Some GOP deficit hawks are leery that the Trump approach may expand the already-swollen national debt even more. At this stage, it looks as if few Democratic lawmakers will back the Trump plan. 

The difficulty of passing tax legislation was highlighted by the failure to overhaul Obamacare. As Mark Hamrick, Bankrate.com senior economic analyst, put it: "When discussing health care, we're talking about a segment of the U.S. economy. When discussing individual and corporate tax reform, we're basically talking about the entire economy. The split within the GOP over taxes might well be just as difficult to overcome." 

While Mr. Trump's plan is sure to look different after going through the legislative grinder, with more details yet to come, the one presented Wednesday has winners and losers:

Big winners: corporations. While the statutory rate on large businesses may be 35 percent, a Government Accountability Office study found last year that large U.S. corporations paid an average 14 percent on their income from 2008 to 2012. What's more, 42 percent of them paid no taxes. 

Trouble is, these companies had to pay a boatload to tax attorneys and accountants to secure these better rates. As the argument goes, wouldn't it be better to let them pay less in taxes without all the bother, and thus be able to hire more workers and spend more on plants and equipment, juicing economic growth? 

Another pro-business feature of the Trump plan is its bid to entice U.S. corporations to return much of the estimated $2 trillion in cash housed overseas, where corporate tax rates are lower. If the U.S. corporate rate were 15 percent, which would make it one of the world's lowest, that would be a big incentive to bring the cash home, thus yielding more tax revenue.

The administration is mulling a one-time repatriation levy of 10 percent to sweeten the pot. 

Perhaps that would translate into a bigger tax haul from big business. Corporations contributed just 9 percent of total federal revenue in 2016. In times past, they gave a lot more: In the mid-1960s, it was over 20 percent. With the Trump plan, "this would be the first time business income was taxed at a lower rate than personal income," said Don Susswein, a principal at the RSM U.S. tax consulting firm. 

Or it could just be a giveaway that benefits no one other than investors and well-paid corporate chieftains? Some critics contend that depending on trickle-down economics, where the benefits given to businesses and the rich also stimulate economic manna for the masses, is folly. 

"Corporations are already dodging their fair share of taxes at a time of record profits, yet he is trying to give them a massive tax cut," said Frank Clemente, executive director of the liberal Americans for Tax Fairness.   

Big winners: pass-through businesses. The point here is to allow small businesses, as well as professional organizations like medical practices, to get the same treatment as corporations -- with the result being more consumer spending and more jobs. After all, small businesses account for the bulk of job creation. 

To the president's critics, his plan is a large conflict of interest. "Trump is seeking to dramatically reduce his own tax bill, while at the same time refusing to show the American people what he already pays in taxes," Americans for Tax Fairness' Clemente said. 

Although Mr. Trump has refused to release his tax returns, claiming he can't while they're under federal audit (a contention many dispute), it's clear he would face a lighter tax load under his plan. The president has more than 500 pass-through entities that contain his real estate holdings. 

Big winners: wealthy individual taxpayers, less so for others. While details are thus far sparse, most Americans would benefit  from the Trump plan, with some doing better than others. Namely, the rich. The administration aims to make taxes less onerous on citizens, both in terms of how much they pay and the difficulty of figuring out tax returns.

Tax brackets would shrink to three from seven. Rates, which now range from 10 percent to 39.6 percent, would be a less-burdensome 12 percent, 25 percent and 35 percent. A big help to lower-income taxpayers would be the doubling of the standard deduction -- what people take who don't itemize -- to $24,000. 

However, what the administration's tax plan would actually do for individuals is unclear without more specifics. An analysis of Mr. Trump's campaign tax plan last year by the Tax Foundation found that the top 1 percent of the population (earning $469,550 and up) would gain $135,460 on average, while a middle-income earner ($48,652 to $88,147) would garner $1,174.

The removal of the 3.8 percent tax on investment income, enacted to help pay for Obamacare, is a boon to wealthier investors. Other than that surcharge, capital gains and dividends are taxed at a 20 percent rate.

The administration also wants to cancel the estate tax, which affects the amount over $5.49 million that an individual passes along to heirs. Now, every dollar below that is tax-free. Mr. Trump would make all of it exempt from taxation.

Also helping the better-off is Mr. Trump's call for axing the alternative minimum tax, launched in the 1960s to ensure that loophole-using rich people paid something. It does this by severely limiting deductions. Because the AMT wasn't indexed to inflation, it now affects households making as little as $200,000, meaning the upper middle-class and no longer just the mega-wealthy. 

But big-money folks like the president would benefit the most if the AMT goes away. That's judging by Mr. Trump's 2005 tax return, a portion of which came to light recently from an unknown source. Because he had huge losses from real estate investments, which he deducted, Mr. Trump would have paid next to nothing ordinarily. But due to the AMT, because it ignores most deductions, he ended up paying at the 24 percent rate, which is still far below the top rate. Take away the AMT, and he needn't worry about that.  

Possible losers: future taxpayers. Treasury Secretary Mnuchin contended that the plan "will pay for itself with growth." In other words, the tax cuts would stimulate economic activity that would generate extra tax income and make up for the shortfalls from lower rates.

There's a longstanding debate over whether that is true, which goes all the way back to Ronald Reagan's 1981 cut. The deficit ballooned under Reagan, but the economy also expanded -- and other influences were at work, such as the squelching of double-digit inflation by the Federal Reserve, which makes clean cause-and-effect analyses difficult.

Would better growth help out at all? Most likely, but not to the extent Mnuchin envisions. Just a third of the cost of tax cuts is recouped because of more rapid economic growth, by the reckoning of Gregory Mankiw, who headed the President's Council of Economic Advisers under George W. Bush.

If so, that means an even larger federal debt because Washington would have to sell more bonds to make up for the diminished revenue. "Unfortunately, it seems the administration is using economic growth like magic beans -- the cheap solution to all our problems," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan watchdog group. "But there is no golden goose at the top of the tax cut beanstalk, just mountains of debt."

Right now, the debt held by the public is 77 percent of GDP. MacGuineas' organization projects that will reach 150 percent by 2050 under current law. And the Trump plan would make it far worse, she said, adding trillions to the $13.6 trillion in debt already on the books. 

That conceivably could thwart needed federal spending to fight recessions or wars, and it could crowd out investments in job-creating private enterprise, as everyone would be buying presumably safer Treasury bonds. And to be sure, the government under this scenario would have to hike taxes radically to pay for everything.

Of course, whether anything close to this plan can or will be passed is problematical, in light of the dynamics of Congress and the ferocity of special-interest lobbyists to protect or even improve their clients' special tax breaks. Cohn and Mnuchin said many of the details had to be hashed out with lawmakers, and what they presented was more of a framework.

"This was not based on a lot of study, but on what could be passed," said Michael Greenwald, a partner at the Friedman LLP tax consulting firm. 

And how long it will take is yet another question. Mnuchin indicated that the tax package would become law this year. It took Reagan five years to pass a major tax reform.

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.