By Glenn Kessler and Michelle Ye Hee Lee
“To protect millions of small businesses and the American farmer, we are finally ending the crushing, the horrible, the unfair estate tax, or as it is often referred to, the death tax.”
The president’s suggestion that “millions” of small businesses and farms are affected by the estate tax is absurd. According to the nonpartisan Tax Policy Center, only about 5,500 estates in 2017 — out of nearly 3 million estates — would have to pay any taxes. About half of estates subject to the tax would pay an average tax of about 9 percent. That’s because for a married couple, about $11 million is exempt from taxation.
Only 80 — that’s right, 80 — of taxable estates would be farms and small businesses.
That’s a big change from the past. In 1977, 139,000 estates had to pay the tax. In 2000, it was 52,000. But Congress has kept raising the exemption and lowering the tax rate. So for virtually all Americans, even farms and small businesses, the estate tax is just not a problem.
“Today, our total business tax rate is 60 percent higher than our average foreign competitor in the developed world.”
Trump exaggerates here. The United States certainly has one of the highest statutory corporate tax rates in the world, currently pegged as high as 39.1 percent when including state taxes. (The federal rate is 35 percent.) Trump says it is 60 percent higher than “our average competitor in the developed world,” comparing 39.1 percent to the average rate for the other members of the Organization for Economic Co-operation and Development, which is 25.5 percent when not weighted for GDP. (It is 31.4 percent when weighted for GDP.)
But the official rate does not necessarily tell the whole story. What also matters is the actual tax a company pays, after deductions and tax benefits. That is known as the effective tax rate, which can be calculated differently depending on the survey. According to the Congressional Research Service, the effective rate for the United States is 27.1 percent, compared with an effective GDP-weighted average of 27.7 percent for the OECD. “Although the U.S. statutory tax rate is higher, the average effective rate is about the same, and the marginal rate on new investment is only slightly higher,” the CRS says.
The Congressional Budget Office, when it examined the issue, said the U.S. effective tax rate was 18.6 percent, which it said was among the highest of the biggest economic powers, the Group of 20.
“Americans waste so much money, billions and billions of dollars and many hours each year to comply with our ridiculously complex tax code. More than 90 percent of Americans use assistance to prepare their taxes.”
Kudos to Trump for updating a formerly misleading phrase that “more than 90 percent of Americans need professional help to do their own taxes.” This 90 percent figure refers to people who file taxes by hiring professionals or using tax software, such as Turbo Tax, which helps people file their taxes on their own. According to the National Taxpayer Advocate’s 2016 report, 54 percent of individual taxpayers pay preparers and about 40 percent of individual taxpayers use software that costs about $50 or more.
Still, it’s worth pointing out that there are more options now for people to easily file their taxes, using these paid or free software. For the 2016 tax year, the Internal Revenue Service launched a Free File program, a public-private partnership that allows people with adjusted gross incomes of less than $64,000 to file their taxes using free software. Roughly 70 percent of American taxpayers are eligible for this free software, according to the Free File Alliance, which partners with the IRS for this program.
“A married couple won’t pay a dime in taxes on their first $24,000 of income. So a married couple, up to $24,000, can spend their money on their family, on their children, on what they have to do — so much better.”
It’s debatable that this would be much better for a middle-class couple with children — and it could be worse. The tax plan would nearly double the standard deduction, $12,000 for individuals and $24,000 for married couples, but also eliminate personal and dependent exemptions (currently $4,050 per family member).
So a couple with two children already “don’t pay a dime” on their first $28,800. That’s because they get $12,600 in a standard deduction and $16,200 in dependent and personal exemptions. It’s possible Trump’s expanded child tax credit might help make up some of the difference, but maybe not.
Lily Batchelder, a professor of public policy at New York University who was deputy director of the National Economic Council in 2014-2015, “conservatively” estimated in 2016 that “Trump’s plan would increase taxes for about 8.7 million families,” but the number could be as high as 11 million under “reasonable assumptions.” That analysis was based on Trump’s campaign plan, which envisioned a larger increase in the standard deduction ($30,000 for a married couple).
“The tax strategy that Ronald Reagan used to create an economic boom in the 1980s when our economy took off, the middle class thrived. And the family income of all families was increasing more and more, and it was a beautiful sight to behold.”
This is a flip-flop. He was always a fierce critic of the bill, Reagan’s Tax Reform Act of 1986, which he now calls “a beautiful sight to behold.” The law simplified tax brackets and eliminated tax shelters, and also lowered the top individual tax rate to 28 percent but raised the capital gains rate to the same level, giving them parity.
In the years following the law, Trump repeatedly blamed it for the savings and loan crisis, a decline in real estate investing and the 1990-1991 recession.
“This tax act was just an absolute catastrophe for the country, for the real estate industry, and I really hope that something can be done,” Trump told Congress in 1991. In a television interview with Joan Rivers, he said: “What caused the savings and loan crisis was the 1986 tax law change. It was a disaster. It took all of the incentives away from investors.”
Trump also frequently attacked one of the Democratic sponsors of the bill, Sen. Bill Bradley (D-N.J.), including in a Wall Street Journal commentary in 1999. “Mr. Bradley’s last big idea to be enacted into legislation was also one of the worst ideas in recent history,” Trump wrote, saying Bradley was responsible for the elimination of a tax shelter for real estate investments. (He said the good parts of the bill could be attributed to Reagan.)
“Indiana is a tremendous example of the prosperity that is unleashed when we cut taxes and set free the dreams of our citizens. … All of this is possible because the people of this state have made a decision … [which] included electing a governor who you may have heard of, who signed the largest income tax cut in the state’s history, our very, very terrific person and terrific vice president, Mike Pence.”
This lacks context. As governor, Vice President Pence did make the largest income tax cut in Indiana’s history — but he didn’t have a very high bar to overcome, and it was a modest cut. Prior to Pence, there was only one time the income tax was cut without an offsetting increase, in the 1970s. Moreover, Indiana’s individual income-tax rate was already the second-lowest in the nation when Pence took office.
The individual income tax rate was 2 percent when it was established in 1964, then it was cut by 0.1 percent in 1979. It rose to 3 percent in 1984, in response to revenue losses from the 1979-1982 recession, according to Purdue University economist Larry DeBoer. Then the rate increased to 3.4 percent in 1988, and remained that way until Pence cut it by 0.2 percentage points, to 3.2 percent.
As governor, Pence established a record of cutting taxes. But according to the Indianapolis Star, state lawmakers raised taxes as soon as Pence left office. And compared to overall tax cuts in Indiana, Pence’s income tax cut is far from the largest tax cut in state history.
“I’m doing the right thing and it’s not good for me, believe me. … We are also repealing the alternative minimum tax, or AMT.”
Trump’s claim that he would not benefit from the tax plan is not credible. Of course, he’s not released his tax returns so it is difficult to know for sure. But he’s certainly subject to the AMT — and the one recent tax return that has been leaked, from 2005, shows that the AMT increased his tax bill from about $5.3 million to $36.5 million. So at least in that tax year, he potentially could have saved $31 million.
