Gregory Daco, chief US economist for Oxford Economics, explains how wealthy individuals might benefit more from Trump’s tax plan despite attempts to make it appear less regressive than prior proposals. Following is a transcript of the video.
Gregory Daco: When we look at the tax proposal that was offered by the administration last week, it proposes tax cuts for both corporations and households, and on the households side there is an attempt to appear less regressive than prior proposals.
A regressive tax proposal is one where the better-off individuals, the more wealthy individuals, the ones that earn more income generally get the greater tax breaks and that’s generally something that doesn’t get a lot of support from the different constituents in the various states.
The main element that has garnered headlines is the reduction in the individual income tax rate. That being said, when we look at the actual proposal and the fact that there is a desire to move from the current seven income tax brackets to just three makes it very complicated to know exactly who will benefit, who will lose from the tax cuts, especially given the fact that these tax cuts are expected to come along with a doubling of standard deductions, i.e. individuals would be able to write off more than they previously were able to.
So you have to factor in these increased deductions with potentially changes in tax rates and one big uncertainty, one big element that we do not know about is how the income tranches will be layered in this new tax framework and that’s extremely important when you come to figuring out who will gain and who will lose from these tax breaks.
There’s a potential that some businesses and some wealthy individuals actually benefit more than some lower-income individuals in the current tax proposal. There are a series of changes that are being proposed, if you look at the low-end of the income tranches, you might notice that there might be a risk of higher taxes for some of the lower-income individuals. Those are expected to be offset by larger standard deductions although the elimination of personal exemptions might actually offset that doubling of standard deduction.
So there is a risk there that actually lower-end individuals might pay more and there’s a potential that via different methods individuals at the wealthy end of the spectrum might actually gain from these tax cuts and we’ve seen that for the top 1% and top 0.1% of income earners and potentially for pass-through at corporations, there might be the potential for actually gaming of the system and reducing your overall tax obligations in this new framework. So, yes there is a potential that in the current environment that’s being proposed, individuals at the wealthy end of the spectrum might benefit more than individuals at the low-end of the income spectrum.
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