The Trump administration on Wednesday proposed a wide-ranging tax overhaul that would slash taxes for businesses and simplify income taxes for individuals and households. The proposal is a barebones outline rather than a detailed plan, leaving many things to be worked out in negotiations with Congress
What We Know: Here are the five most important things we have learned from the proposal:
A Much Bigger Standard Deduction:
The administration’s wants to double the standard deduction for individuals and households, exempting far more income from taxation. The change would raise the deduction for couples from $12,700 to approximately $24,000 and raise the deduction for single filers from $6,300 to $12,600.
“A married couple will not have to pay taxes on the first $24,000 it earns,” National Economic Council Director Gary Cohn said in a press conference introducing the proposal.
The larger standard deduction reduced the value of itemized deductions, such as the deductions for charitable giving and mortgage interest, because the tax savings from these is proportional to a household’s marginal tax rate. This minimizes the impact on households from the elimination of most itemized deductions included in the plan and decreases the distorting effects of the mortgage interest deduction.
Because doubling the standard deduction would significantly reduce the benefits of itemizing for most taxpayers, it also has the effect of simplifying the tax system. Currently, less than one-third of tax filers, or 45 million households, itemize their deductions. An analysis of a similar proposal by The Tax Policy Center last year estimated that the combination of eliminating most itemized deductions and doubling the standard deduction would result in 38 million households who would otherwise itemize deciding to opt for the standard deduction.
According to the Committee for a Responsible Federal Budget, a group that is critical of the proposal, this will result in households and individuals paying $1.5 trillion less in taxes over the next ten years.
A Lower Top Rate and Fewer Tax Brackets:
The proposal calls for the number of tax brackets to shrink to three from seven, with marginal rates of 10 percent, 25 percent, and 35 percent. Currently, marginal tax rates start at 10 percent and rise to a top rate of 39.6 percent.
Keeps Charitable Giving and Mortgage Interest Deductions, Eliminates the Rest:
Trump’s plan would leave in place the deductions for mortgage interest and charitable contributions while eliminating other deductions, including the deduction for state income taxes that benefits residents of high-tax states.
The impact on most households of eliminating those deductions, however, will be cushioned because of the rise in the standard deduction and the reduction of the top rate, as the value of deductions is a function of the marginal tax rate. The loss of the ability to deduct state income taxes might also incentivize wealthy Americans in high tax states to lobby local lawmakers for lower tax rates.