Who Gains the Most From Trump’s Latest Income Tax Proposal?
The debate over how taxes work in America is heating up, and it is a political showdown with real money on the line. President Donald Trump has put forth a number of ideas that could completely change what Americans pay and how they pay it. It’s a conversation filled with competing claims and a lot of passion.
With so many different proposals and so much political talk, it’s hard to know what’s real and who stands to benefit. The facts, however, paint a detailed picture.
The Tariffs-for-Taxes Proposal
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One of the boldest ideas from the Trump camp is the possibility of replacing federal income taxes with tariffs. The idea isn’t new; it is similar to early American financial policy, where tariffs were the main source of government revenue.
Financial experts say that if this plan were to happen, the winners would be clear. High-income individuals and domestic businesses would likely benefit the most. High-income earners pay a large share of the current income taxes. Eliminating that would be a significant gain.
These households also save or invest a large portion of their earnings. Their spending on imported goods would be a small part of their overall finances, so the new tax burden would be negligible for them.
Meanwhile, domestic businesses that do business at home would also have an easier time. Tariffs on imported goods would provide a barrier against low-cost foreign competition in industries like steel, aluminum, and furniture.
The downside of this plan would be a real burden on low-income earners. These households spend a high percentage of their income on consumer goods, many of which are imported. This would make them bear a disproportionate share of the new tax burden.
Extending the 2017 Tax Cuts
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A second, more immediate, part of the tax discussion is the future of the Tax Cuts and Jobs Act (TCJA) from 2017. Many of its tax breaks for individuals are set to expire after 2025. This has led to a big debate in Congress.
House Republicans have passed a budget plan to extend these cuts. Democrats argue the plan is a “reverse Robin Hood scam” that gives to the rich. Republicans claim it is a windfall for the working class. As it turns out, both sides have a point. The final answer depends on the metrics you use.
Here’s a closer look at the numbers.
The wealthiest Americans would get the largest tax cuts in total dollars. The top 5% of earners would get over 45% of the total benefits. Taxpayers in the top 1% could see an average tax cut of around $70,000, which would boost their after-tax income by over 3%. Middle-income households would get a tax cut of about $1,000, increasing their after-tax income by a smaller percentage.
The original TCJA lowered taxes for most people across the income spectrum. Experts say that if the provisions are extended, about two-thirds to three-quarters of taxpayers would get some form of tax relief. It’s not a universal tax cut, but it would prevent a tax increase for many.
Some economists warn, though, that if the tax cuts are extended alongside spending cuts to programs like Medicaid and food stamps, lower-income Americans could end up worse off.
The Higher Rate That Doesn’t Do Much
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Another detail in Trump’s tax plan is a proposal to let the top tax rate revert to 39.6% for taxable income over $5 million for married couples. At first, this might seem like a way to have the wealthiest pay more, but a closer look at the tax code tells a different story.
One tax policy organization found that this higher rate would have a minimal effect on the wealthiest taxpayers. The reason is simple. Most income for these individuals is not subject to the ordinary income tax rates. A large part of their income comes from things like long-term capital gains and qualified dividends, which are taxed at a lower, special rate. The proposal does not touch those rates.
The analysis, using IRS data from 2022, showed that for taxpayers making over $10 million, only about 15% of their total income would have been subject to the new 39.6% rate. The bulk of their income would remain unaffected. This detail shows that the question of who benefits is a lot more complex than it first appears.
What It All Means
Debates over these tax proposals show that the tax system is complex. A single change can have many different impacts. Plans to replace income taxes with tariffs would benefit high-income earners and domestic businesses, but would hurt low-income consumers.
Extending the TCJA would prevent a tax increase for many, but the biggest dollar savings would still go to the wealthiest. Finally, a new proposal to increase the top tax rate would likely not change much for the super-rich, due to the special tax breaks they already receive.
Specifics of tax policy often get lost in political talking points, but the real impact of these changes comes down to how they affect individual incomes and spending.