United States President Trump has made tax reform a cornerstone of his administration since the time of his inauguration. Many economists and politicians have favored simplifying the tax code through the elimination of deductions and lowering of marginal tax rates for some time now. This approach was favored by the doomed “Simpson Bowles” plan that died without congressional approval.

Many details of Trump’s proposed reforms to the personal and corporate tax code are not yet in focus. But enough of them are to begin understanding the consequences of his proposal.

The statutory corporate income tax rate is 35% – but the effective rate is typically only about 17%-18% each year because of the ability of corporations to make large deductions. The largest of these deductions are the ability to defer taxes on foreign income until the money is repatriated and accelerated depreciation expenses. Trump’s plan calls for a new corporate tax rate of 15% along with the elimination of most corporate tax deductions. Foreign earnings, however, would not be taxed at all and past earnings will be allowed to be repatriated at a one-time special rate. Assuming every single deduction is eliminated on corporations, their average┬átax rate will still fall from the 17%-18% range to 15%. With $2 trillion in corporate profits, that cost could amount to $40 billion or more each year in income to the Federal Government.

The highest personal tax rate in the United States is 39.6% – Trump wants to simply the number of tax brackets to three with rates of 10%, 25%, and 35%. He also wants to eliminate most personal deductions excepting the mortgage interest, charitable, and retirement saving deductions. He also recently voiced support for expanding child tax credits.

The largest personal deductions allowed for in the US tax code, with their annual costs in billions of dollars and Trump’s proposal to maintain or eliminate the deduction.

That means that although many would find themselves in a lower tax bracket, key deductions will be lost including the ability to deduct employer-provided health insurance as well as state and local taxes. The major savings that would accrue to poorer households is an increase in the standard deduction to $12,000. This amount of income would essentially not be taxed at all.

Current marginal income tax rates in the US by income range.

What Trump will actually get will depend on a lot of factors, including how much the final plan is likely to increase the national debt. The US has already accumulated federal debt about equal to its gross domestic product and the federal deficit is currently running at about 2.5% of GDP per year. According to the Committee for a Responsible Federal Budget, the tax plan is likely to cost $5.5 trillion over five years.

For tax reform to be a reality, Trump is likely going to have to make some concessions to assuage concerns on income inequality and the federal deficit.

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