Will Trump’s Proposed Tax Cuts Help You and Your Family?

We discuss Trump’s tax cuts and spending cuts as found in the AHCA (a budget reconciliation bill) and in his budget to find out their effects on the average American.

Introduction to the Trump Tax Cuts and Spending Cuts

Trump wants a lower federal Income tax, a lower corporate tax, the abolition of the estate tax, lots of deregulation, and lots of spending cuts to programs like Medicaid, the ACA, and SNAP. The question all Americans should be asking themselves is, “what is the net effect of this?”

To answer this question, let’s look at income taxes first.

Income Tax Cuts

Trump wants to lower the federal income tax, and that means those who make the most income and  the higher earning people in the middle class will see a tax break.

However, this tax break is offset heavily by cuts to spending and other rules. Thus, the net effect on the middle class and poorer classes (a total of about 75% of Americans) is not necessarily “a net reduction in spending.”

Other taxes and cost of living items take a far larger percentage of the most people’s earnings than income taxes do. We discuss the various elements of taxation and the cost of living as they apply to different income groups.

To read an excellent discussion of this issue, please see PBS’s article, How Much do the Poor Pay in Taxes?[1]

Lowering income taxes sounds good, but how much would it help you?

Trump’s proposed income tax changes sound as though they will help everyone, but will they help you? He has proposed reducing the number of individual tax brackets from seven to three, raising the standard individual deduction, eliminating the estate tax and the alternative minimum tax, and eliminating corporate taxes on foreign profits.

Americans with low to medium incomes, the bottom 45% of earners don’t pay income tax while the next 40% pay tax percentages in the single digits. See About Half of American Families Pay Little to No Income Tax for details.[2]

Income tax is not the only tax problem Americans face. Other taxes and cost of living items fall hard on all income levels and, naturally, take a larger percentage of the income of low-earners.

What Other Common Taxes and Charges are There?

  • The Federal Payroll Tax (FICA) is a tax taken out of workers’ paychecks and matched by employers to fund Social Security and Medicare. Those who are employed pay 7.65%; if you are self-employed, you pay 15.3%.
  • State and Local Taxes vary from state to state. 45 states collect state and local taxes, which range from a high of 9.98% in Louisiana to a low of 1.76% in Alaska.[3] Some states have high sales taxes but no income taxes. Washington is one such state. You have to look at all the taxes and cost of living expenses as a whole.
  • Excise Taxes are included in the price of a product and paid only for specific goods like gasoline, alcohol, cigarettes, gambling, trucks using highways.
  • Property Tax is levied by a governing authority of the area in which property is located. It varies by location. New Jersey has an effective real estate tax rate on homes of 2.35%, while Hawaii charges 0.27%. Vehicle taxes range from Rhode Island’s 4.77% to a large number of states who have no vehicle taxes.[4]
  • Estate Tax is a tax of 40% on every dollar over $5.49 million (or effectively $10.98 million per married couple) in 2017 dollars. That means it only applies to roughly .02% of families in the U.S. (according to the Center on Budget and Policy Priorities) in its current form. Trump plans to cut this completely; the lack of revenue for the government is offset by cuts to assistance spending.
  • ACA (ObamaCare) Taxes are taxes in the Affordable Care Act (ObamaCare) that help pay for healthcare cost assistance. Hundreds of billions of dollars in taxes are cut, and hundreds of billions in spending is cut too. The CBO and JCT estimate that enacting the American Health Care Act (TrumpCare) in the form it was in when it passed the House would reduce federal deficits by $119 billion. It would also increase the number of people who are uninsured by 23 million relative to the current law over the next decade [for a total of 51 million uninsured by 2026]
  • Interest on Loans and Credit Balances have a huge range. One person with good credit might get a 0% auto loan, while another may pay more than 20% in interest. The one thing you can be sure of is that the worse you credit history is and the more you need money, the more you will have to pay for it.
  • Healthcare Costs vary immensely especially given the uncertainty of health coverage under Trump. One of the best sources for information is The Kaiser Foundation. Healthcare costs are offset by assistance programs, but Trump’s budget cuts funding for many of these programs.[5]
  • Childcare Costs are one of the largest costs families face. You can find a state by state breakdown of costs from Child Care Costs from The Economic Policy Institute here.[6] Many families find that the expense of child care is greater than the amount of income that can be made by working or that there is insufficient money left for living expenses after child care is paid.
  • Mortgage or Rent Costs are often the largest expenses people face. Costs can range from about 30% of income in a state-sponsored affordable housing to over 70% in high-cost markets like San Francisco or Manhattan. See The Cost of Buying vs. Renting a Home in all 50 States.[7]
  • Other Costs of Living including Food can also be huge variables. You can see Cost of Food at Home at Four Levels for 1 2014 government estimate. Buying food outside the home can easily explode the more careful budget, as we all know. Trump’s budget cuts funding for food assistance programs like SNAP and Meals on Wheels.

Income Tax is Often not our Big Financial Problem

Most of us are far harder hit by the cost of living expenses, FICA, property taxes, excise taxes and the other costs mentioned above than we are by income tax.

Those costs are offset by the assistance and tax credits.

Although politicians often promise income tax breaks as a way of making people think they should elect them, these promises mean little when the cuts are focused on the wealthy and assistance programs are cut to pay for the tax breaks.

In fact, income taxes benefit to top 20% of earners a bit and the top 1% of owners a lot.[8]

FACT: Although specific numbers are hard to cite, the TPC data presented below shows that in total, nearly half (about 45%) of Americans don’t pay any federal income taxes at all under the current tax code (they have an effective federal income tax rate of zero or less). This portion of Americans depends on assistance and is burdened by other taxes like payroll and sales taxes (which aren’t being cut under Trump).

Why Does it Matter?

The Joint Committee on Taxation noted that the 80 million people who make $40,000 or less will pay little or no Federal tax but will pay $121 billion in Medicare, Social Security, and Payroll taxes. 75% if middle-income households pay three times as much in payroll taxes than income tax.[9]

The tax breaks Trump is passing may sound good on paper, and the assistance cuts may sound like they target those who don’t contribute their fair share. However, the net effect is very little savings and the shifting of the tax burden onto the working poor and middle class in hopes that wealth and jobs will trickle down.

President George H.W. Bush told us that Reagan’s supply-side economics (voodoo economics) didn’t work; Trump’s plan is like a supercharged version of Reaganomics. It might sound good on paper, but it is going to come at a steep cost to about half the country. If the deregulation plan for the banks doesn’t work, the cost could be even greater than that.

Citations

  1. How Much do the Poor Pay in Taxes?
  2. About Half of American Families Pay Little to No Income Tax
  3. State and Local Tax Rates in 2017
  4. 2017’s Property Taxes by State
  5. The Kaiser Foundation
  6. Child Care Costs
  7. The Cost of Buying vs. Renting a Home in all 50 States
  8. Trump’s ‘Massive’ Middle-Class Tax Cuts are Tiny Compare to those Promised to the Rich
  9. For Most Households, it’s About the Payroll Tax, Not the Income Tax

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