Anthony Michael
Project Manager
Last week, AE released its analysis on President Trump’s Tax Reform proposal, which you can find here. After releasing the article, we received a lot of feedback and questions about how the proposed tax reform will impact Texas households. Given these requests, we decided to begin a mini-series that will examine a different component of the tax reform proposal each week.
To begin, we are going to dive into the provision to consolidate income tax rates to 10%, 25%, and 35%. Many prominent voices in the GOP have billed tax reform as overarching tax cuts, but upon closer examination of this provision in particular, this doesn’t appear to be so black and white.
In today’s tax system, we have seven tax brackets. Under the administration’s proposal, the number of tax brackets would be consolidated into three for each filing type. Inevitably, this shuffle will push millions of taxpayers into brackets that levy different tax rates than they currently pay.
To understand this, consider the 2017 and “Trump” proposal rates for married filers:
Married Filers | |||||
Tax Bracket | Lower Bound | Upper Bound | 2017 IRS Tax Rate | “Trump” Tax Rate | Difference in Tax Rates |
1 | $0 | $18,650 | 10% | 10% | 0% |
2 | $18,650 | $75,900 | 15% | 10% | -5% |
3 | $75,900 | $153,100 | 25% | 25% | 0% |
4 | $153,100 | $233,350 | 28% | 25% | -3% |
5 | $233,350 | $416,700 | 33% | 35% | +2% |
6 | $416,700 | $470,700 | 35% | 35% | 0% |
7 | $470,700+ |
| 39.6% | 35% | -4.6% |
Under the Trump administration’s proposal, some brackets will have the same rate (tax brackets 1, 3, 6), some will have lower rates (tax brackets 2, 4, and 7), while those in tax bracket 5 will see their rate increase.
Once the dust settles, many middle class and ulta-wealthy households will receive large breaks on their tax rate, while relatively weathly households in tax bracket 5 will see a 2% increase to their tax rate.
Now, a 2% increase may seem negligible for those in tax bracket 5, but consider a household with $300,000 in taxable income. Under this provision, this household would owe an additional $1,333 on their taxes. Certainly, a household with $300,000 in taxable income won’t be struggling to pay an additional $1,333 in taxes, but nonetheless, households in this bracket will pay higher taxes under the proposed tax system.
Therein lies a major difficulty that the Trump administration will face as they move forward with tax reform. While it is being advertised as tax cuts across the board, not every household is poised to see lower taxes under the proposal. Inevitably, the push for overarching tax cuts is only mostly true, and perhaps characteristically over-generalized. As will be the case for all tax reform provisions, there will be some winners and some losers.
Stay tuned as this mini-series will continue to dive into different components of the Trump Administration’s tax reform proposal. To get the latest updates on tax reform, follow us on LinkedIn or Twitter.
Have any questions? Send an email to amichael@angeloueconomics.com
