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Donald Trump’s tax plan, explained

Trump's tax plan: good for people who can afford personal drivers.
Trump's tax plan: good for people who can afford personal drivers.
Sean Rayford/Getty Images
Dylan Matthews is a senior correspondent and head writer for Vox's Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

Donald Trump unveiled his new plan for overhauling the federal tax code in a speech at Trump Tower in New York this morning. The plan — previewed in a Wall Street Journal article and detailed by the campaign here — is being sold as a populist overture, a cut for the poor and middle class that still hits rich hedge fund managers, in sharp contrast to the more rich-friendly proposals of Trump's rivals like Jeb Bush, Marco Rubio, and Rand Paul. "I don't want to have certain people on Wall Street getting away with paying no tax," Trump told 60 Minutes' Scott Pelley on Sunday night.

But in reality, Trump's proposal promises cuts for the rich even larger than Bush's. It slashes the corporate tax rate by more than half. It cuts tax rates on capital gains and investment income. It's an orthodox supply-side conservative tax plan in a middle-class tax cut's clothing.

The basics: Trump's plan for individual taxes

  • There would be three individual tax brackets: 10 percent, 20 percent, and 25 percent. For comparison, the current top rate is 39.6 percent.
  • Income under $50,000 for couples ($25,000 for singles) would be tax-free; the 10 percent rate would apply to income from $50,000 to $100,000 for married couples; the 20 percent rate to income from $100,000 to $300,000; and the 25 percent rate to income above that.
  • The top capital gains rate would be cut to 20 percent from 23.8 percent, through the elimination of Obamacare's 3.8 percent surtax.
  • The first 15 percent capital gains rate would kick in at $100,000 for couples, not the current $74,900. But the 20 percent rate would kick in a little earlier: $300,000, not $464,850.
  • Mortgage interest and charitable deductions would be unchanged, but other deductions and tax breaks would be limited for top earners, including by "steepening the curve of the Personal Exemption Phaseout and the Pease Limitation on itemized deductions" and "phasing out the tax exemption on life insurance interest for high-income earners."
  • The alternative minimum tax — which ensures that wealthy households' taxes don't fall too much due to deductions — would be eliminated.
  • The estate tax would be eliminated.
  • Hedge fund and private equity managers would see performance-based fees known as "carried interest" taxed at the ordinary income tax rate, rather than the capital gains tax rate. Given other provisions of Trump's plan, this change would only raise the top rate for performance fees from 23.8 percent to 25 percent, which isn't that significant, and is likely offset in the vast majority of cases by Trump cutting taxes for fund managers' basic management fees.

The basics: Trump's plan for corporate taxes

  • Instead of the 35 percent top rate, corporations would pay a flat tax of 15 percent.
  • The 15 percent rate would apply to all businesses "from a Fortune 500 to a mom and pop shop to a freelancer living job to job," so "pass-through entities" like partnerships and S-corps would no longer pay individual tax rates.
  • All $2.1 trillion in multinational corporations' cash overseas would be taxed at 10 percent, regardless of where it's parked.
  • Trump would "reduce or eliminate corporate loopholes that cater to special interests, as well as deductions made unnecessary or redundant by the new lower tax rate on corporations and business income," per his campaign.
  • He'd also "phase in a reasonable cap on the deductibility of business interest expenses."
  • He would continue to tax foreign earnings of US companies going forward, unlike Bush and Rubio who favor a "territorial" tax system in which foreign earnings go untaxed. He would, however, let companies take a credit for corporate taxes paid abroad.

How much would Trump's plan cost?

Trump's campaign insists the plan would be "revenue neutral." It's hard to see how this could be the case. Based on the tax bracket thresholds in the plan, just about no one would face a higher marginal tax rate than they do now.

The 10 percent tax rate kicks in at $50,000 for married couples; today, married couples with that much taxable income are paying 15 percent. The 20 percent rate under Trump's plan kicks in at $100,000; currently, couples at that level are paying 25 percent. The 25 percent rate kicks in at $300,000; couples at that level now pay 33 percent, and then there are two more brackets beyond that.

Trump would slash rates for just about everybody, across the board. Especially if he plans to entirely preserve the mortgage interest and charitable tax deductions — two of the most costly tax expenditures — it's hard to see the math working out such that the government wouldn't lose revenue.

One caveat: Trump has spoken often of his desire to slap tariffs on foreign imports. That could potentially make up a good amount of lost revenue, but would also greatly increase the cost of goods in the US, cause significant economic damage, and probably provoke a massive trade war. When Pelley asked about the tariff idea on 60 Minutes, Trump seemed to demur, saying, "I don't want to say tax anything. I'm talking about a fair war. I'm talking about, also, I have the smartest people on Wall Street lined up already. They're going to represent us on Japan, on Mexico."

Who would Trump's plan help?

Trump cuts income taxes — which are overwhelmingly paid by the rich — and does in a way especially likely to help the rich.

Pew Research Center

Trump's plan would almost certainly help the rich disproportionately. The slashing of the corporate tax rate, for one thing, would have major regressive implications. Jim Nunns of the Tax Policy Center has found that about 20 percent of the corporate income tax is paid by workers, and the rest by capital; he concludes that in 2015, the top 1 percent pays 52.8 percent of the corporate tax burden, and the top 0.1 percent pays 33.4 percent. So slashing the corporate rate to 15 percent from 35 percent would overwhelmingly help the richest Americans.

While everyone who pays income tax would benefit from the bigger initial exemption in Trump's plan, the elimination of the 28, 33, 35, and 39.6 percent tax brackets only helps households making six figures a year, and it helps them substantially. Those households also benefit from the higher kick-in of the 10 percent, 15 percent, and 25 percent brackets. Given that Trump doesn't call for expansions of the earned income tax credit or the child tax credit, the 40.4 percent of households already not paying any income tax won't get anything out of his proposal.

However, they would, apparently, get to fill out a tax form that says, "I win":

Trump would also grow that 40.4 percent figure — or the "47 percent" as Mitt Romney famously called them — substantially. His campaign told WSJ that 31 million more households would see their income tax bills reduced to zero. Assuming the reforms take effect in 2018, that boosts the number of households with zero or negative income tax liability from 64 million to 95 million — or from 38.3 percent to 56.9 percent.

How does Trump's plan stack up?

Trump's plan is, in every particular, more moderate than the plan he laid out in his 2011 book, Time to Get Tough. Then, he called for a top rate of 15 percent; today, it's 25 percent. Then, he wanted to eliminate corporate income taxes all together; today, he only wants to cut the rate to 15 percent. Then, he wanted to slash capital gains tax rates to 15 percent; today, he's okay with 20 percent. Then, he wanted a 20 percent tariff on all imports; the 2015 plan as laid out in the Wall Street Journal does not specify a general tariff rate.

But it's a more extreme plan than Bush has proposed, featuring a lower corporate rate (albeit one that still includes overseas income) and a lower top individual rate. It's a bit harder to compare to Rubio's plan. While Rubio features a higher corporate rate (25 percent) and top individual rate (35 percent), he'd also completely eliminate taxes on capital gains and investment income, which would produce a huge windfall for wealthy Americans. Trump does not go that far, even as he still slashes the top capital gains rate.

Trump's plan is also tough to compare with Rand Paul's, which institutes a 14.5 percent flat tax on ordinary and investment income (which is a bigger cut than Trump proposes) alongside a 14.5 percent VAT to replace the corporate tax (which would result in a big tax hike for low-income individuals, but which could wind up helping wealthy people by letting corporations off the hook).

Watch: How wealth inequality is dangerous for America