We discussed then President-elect Donald Trump's tax plan and what it might mean for your wallet. Our group here at the Penn Wharton Budget Model (PWBM) worked with the Tax Policy Center to analyze all the candidates' tax plans (Trump, Hillary Clinton and the House GOP plan). To see the results, change the assumptions or play with the model yourself, visit the PWBM website. You can even compare his plan against alternatives such as Secretary Clinton's and the House GOP.
President Trump has many items on his agenda, including massive changes in taxes. So let's get right to the nitty-gritty of what the Trump tax plan actually does, starting on the individual side of things. For individuals, Trump's tax plan would:
- raise the size of the standard deduction, meaning fewer people would have to itemize their deductions;
- change the tax rate brackets, from seven to just three;
- cut the top tax rate of 39.6 down to 33 percent;
- get rid of the alternative minimum tax;
- get rid of the Affordable Care Act in its entirety, which would eliminate the 3.8 percent net investment tax credit as well as penalty for non-compliance;
- eliminate the estate tax, which means people could leave money to heirs and pay no federal tax on it when they die; however, capital gains would now be owed at death.
Though the media has primarily focused on individual taxes, Trump's changes are even larger on the corporate side:
- replace the interest deduction with full expensing of all new capital investments
- cut the corporate tax rate from 35 to 15 percent
- extend that 15 percent rate across the board to corporations, c-corporations and pass-through corporations
Bob noted that the new tax brackets would significantly cut tax revenue from the top 1 percent of income tax payers. At the same time, the analysis at the Tax Policy Center has shown that the top 1 percent pay almost a quarter of the federal income taxes; the top 10 percent pay the majority.
So what does this mean for taxpayers? Bob replied, "I think you want to look at what this does to people's income after they pay their taxes, how much does it give them in their pockets to spend after the tax cuts? What we find is that the biggest increase in after tax income goes to the people at the very top of the income distribution."
People in the top one percent, for example, would see their after-tax income go up to about 14 percent, in contrast to the overall average, a four percent increase. And people at the bottom end, the poorest 20 percent, would see less than a one percent increase in their after-tax income.
"So vast benefits would go to people at the top end who don't need more money and their behavior will less directly stimulate the economy in terms of spending the money," Bob noted. "What we've seen over the years is that Americans have money in their pockets but they're not investing because they don't think the economy is doing that well. So it's not clear that putting more money in their pockets will boost the economy in the way we might like."
Bob cautioned, however, that Trump's tax plan, in its current iteration, is really just a first "negotiating point." Trump will present his plan to Congress and there will likely be much back and forth. At the end of the day, Congress will craft a bill that will cut taxes in a major way. What exactly this bill looks like remains to be seen.
"I think we will see a lot of discussion about what can we do," Bob said. "We know we have a very large budget deficit. Do we worry about bringing enough revenue in?"
There's nothing concrete in the Trump plan to offset the very large revenue losses that his plan would entail, Bob said. "We estimated it at losing seven trillion dollars over ten years. So do you worry about that? If you do, you have to pare back the plan in a big way to get rid of those revenue losses."
I asked Bob if he believed that a trade war could actually happen if Trump starts to raise tariffs in a way to get more tax revenue. "We have seen that happen in the past in history," he said. "The big issue is how quickly the president will figure out what he can and cannot do and how hard it is to do some of the things he'd like to do."
So if you're the average person - not part of the top one percent - and if there is a trade war coming along, maybe combined with tax cuts, what should you be doing?
"I think the bottom line right now is watchful waiting," Robertson said. "Don't put all your eggs in one basket. Don't panic and pull everything out of the market. Flexibility is key, because we don't really know what will happen."
Kent Smetters is the Boettner Professor of Business Economics and Public Policy and faculty director of the Penn Wharton Public Policy Initiative at the Wharton School of the University of Pennsylvania.