How will this impact my family? That was my first reaction to the newly released details on the proposed Trump tax plan. Which I suspect was the same reaction for most people.
Like any good personal finance blogger, I whipped out my trusty excel sheet and went about calculating the impact. I wasn’t looking for a deep analysis which factors in all the nuances of our complicated tax code, like deductions, and credits.
I was just looking for a simple Trump tax plan calculator which could quickly let me know who could potentially get screwed. Someone has to…right!? It better not be me!
Trump Tax Plan Brackets
Let’s have a look at the new proposed income tax brackets and their respective marginal tax rates. I’ll focus on household income comparisons in this article to keep things simple.
You can argue about what the income thresholds should be, and whether they are appropriate. One thing that’s hard to argue is that this is a much simpler approach compared to the current brackets.
We basically go from 7 brackets down to just 4. I’m all for the KISS principle (Keep It Simple Stupid).
The new income brackets also imply that a household’s income is considered “rich” at anything over $1 Million. The current highest income bracket is at $470K, which many households in high cost of living cities will admit does not qualify them as rich.
Don’t get me wrong, you’re doing pretty well as a household if you make more than $470K a year. Regardless of which city you live in. That’s still about 6X the average household income in the US of ~$73K a year.
That kind of household is usually made of two working professionals in high income careers. But it’s still a far cry from the truly wealthy households of CEOs, celebrities, and trust funds. Those households make Millions a year, and I have no doubt most people would agree that’s the classic definition of “rich”.
Who Benefits the Most from the Trump Tax Plan?
So in this brave new world, we have a simplified tax plan. But who really benefits from this financial wizardry?
This is where my trusty excel file comes in. In the spirit of keeping things simple, I just built a table that calculates the effective tax rate at various household income levels. I then calculated the benefit to each household as a percentage of their tax savings.
Keep in mind again that this does not factor in deduction and credit benefits. The is simply a look at the proposed Trump tax plan at face value.
I have to admit that the results were a bit surprising to me. There doesn’t seem to be a logic to the distributions, although it’s clear the biggest beneficiaries from an absolute tax savings standpoint are those households around the $100K income level.
Those are the households closest to the average in the US currently. That’s another way of saying that the average household benefits the most from this tax plan.
Here’s the same information shown graphically…
Households making $250K and below benefit the most from the new plan, with the exception of those right around the $200K level.
The rich also benefit, with a savings of almost 8.5% under the new plan if you’re a household making $1M. However, the ultra wealthy don’t see much of a change, which makes sense since the highest bracket percentage wasn’t changed.
I can’t see many people getting upset over these changes, although perhaps the ultra-wealthy households may be disappointed.
There’s a lot of talk about the corporate tax rate going from 35% to 20%. That could indirectly benefit the utra-wealthy since corporations tend to “bank” those savings in dividends, stock buy-backs and indirect executive compensation increases. However, the effective tax rate of most corporations is already around 18.6%, which isn’t that big of a change.
Interestingly, no one really pays more under the new plan. So everyone’s basically a winner, although clearly some households wouldn’t benefit as much as others.
This was not meant to be a political post of any kind. I wrote this article to satisfy my own curiosity since there were many conflicting headlines in mainstream news outlets over who this tax plan really benefits.
My biggest take-away is that lower income households would seemingly benefit the most from the plan, and higher income households aren’t really that affected. Of course, this is all taken at face value, meaning this is a very simplistic way of looking at the potential reforms.
I’m guessing most people will just look at the brackets, make their own judgment, and move on. The reality unfortunately is more complicated. Someone will get screwed if these changes make it into law, if you’re really interested in how complicated it can get, check out this deep dive from Michael Kitces.
The real question of course is how this plan will be funded. If everyone benefits, the cost of those savings needs to be offset somehow. I guess we’ll see what really ends up passing in the next few months. There’s been enough dysfunction in government over the past few years that everything should be taken with a grain of salt.
It’s also clear from these changes that the absolute tax burden would still be carried by the same tax mules who have traditionally carried it.
Although this is a good step towards simplification of the tax code, I still think it’s well short of where it needs to be. This stuff is still way too complicated when you factor in all the vested interests trying to get their special treatment.
If I can’t do my taxes in 10-15 minutes online, we still have a long road ahead of us.
Readers, were you surprised by the proposed trump tax plan? Would you benefit more or not as much by the changes? Is this all smoke and mirrors or ultimately a positive change? Share your thoughts and comments below!