Former President Donald Trump is taking a different approach from the typical Republican tax strategy. Instead of cutting tax rates for everyone, he’s focusing on changing specific things.
He’s planning to remove the state and local tax cap and boost deductions for certain types of income. These ideas bring back some old tax methods from before the 1980s. This makes us wonder how these changes will affect everything as the country faces budget challenges.
Key Takeaways
Former President Donald Trump is proposing a new tax plan that reverses the traditional Republican strategy of broadening the tax base and instead focuses on targeted tax benefits.
- Trump’s plan would remove the state and local tax cap, boost deductions for certain types of income, and make auto loan interest deductible, which could benefit higher-income taxpayers and residents of high-tax states.
- The plan would also exempt Social Security income from taxation, but this could add $1.2 trillion to the national debt over the next decade.
- Trump’s proposals are expected to raise taxes on average Americans while giving more tax breaks to businesses and the wealthy, with the wealthiest 1% seeing an average tax reduction of around $36,300.
The return of targeted tax benefits
The Republican tax strategy has long focused on broadening the tax base, lowering rates, eliminating loopholes, and simplifying the tax code. The Tax Cuts and Jobs Act of 2017, signed by Trump during his first term, was a big step in this direction. It included a $10,000 limit on the SALT deduction, which especially impacted high-tax states like New York, New Jersey, and California.
Recently, Trump has signaled a change in this approach. By suggesting that the SALT cap should end, he’s going against the traditional Republican stance on taxes. Ending the cap would mostly help higher-income taxpayers, with those in the top 1% likely seeing over $20,000 in tax cuts, while lower-income earners would see little benefit. Residents of states with high local taxes like New York and California might save significantly, showing Trump’s strategic reach for wealthier voters in these areas.
Trump’s new tax ideas include making auto loan interest deductible and not taxing Social Security income. These target specific groups and are a shift from his earlier focus on a broad tax base. The idea of making auto loan interest deductible resembles policies before the Tax Reform Act of 1986, which got rid of many such specific deductions to aim for a simpler tax system.
Impact on different income groups
These targeted tax relief measures could assist certain groups of voters. For instance, car owners in states with a high number of drivers, workers who receive tips in Nevada, and seniors across the country might pay less in taxes. However, there are concerns about how these plans will impact the national debt, which is already increasing. The Tax Foundation estimates that not taxing Social Security income could significantly reduce federal revenue, adding $1.2 trillion to the deficit over the next decade.
The tax proposals announced by former President Trump would generally lead to a tax cut for the wealthiest 5 percent of Americans and a tax increase for everyone else, based on a new detailed analysis by the Institute on Taxation and Economic Policy (ITEP).
While many of Trump’s proposals have been looked at separately, the ITEP report is the first to thoroughly analyze how implementing all these proposals would affect American families at different income levels.
This is the most detailed analysis available, and the results are clear, says Amy Hanauer, ITEP’s Executive Director. Trump’s tax proposals would significantly raise taxes on average Americans while giving more tax breaks to businesses and the wealthy, she noted.
If these proposals come into effect in 2026, the wealthiest 1 percent—those earning $914,900 or more—would see an average tax reduction of roughly $36,300. The next wealthiest 4 percent, earning between $360,000 and $914,900, would benefit from an average tax cut of around $7,200.
For individuals in all other income brackets, taxes would generally rise. For instance, the middle 20 percent, with incomes between $55,100 and $94,100, would experience an average tax increase of over $1,500, while the lowest 20 percent, earning below $28,600, would face an average increase of about $800.
Considering the impact as a share of income, the tax hikes would disproportionately affect working-class households, with the burden becoming heavier as incomes fall. The middle 20 percent would see an average increase equal to 2.1 percent of their income, whereas the lowest 20 percent would experience an average tax rise of 4.8 percent of their income.
Who benefits from Trump’s tax proposals
Many of Trump’s ideas would mostly help wealthy people. This includes keeping the 2017 tax changes and lowering corporate taxes even more. He also wants new tariffs, which would raise costs for everyone, but hit working-class families the hardest, says Steve Wamhoff from ITEP. Overall, these plans would let the richest 5 percent move some of their tax load onto others.
The ITEP analysis covers Trump’s main tax ideas. He wants to keep most of his 2017 tax law changes set to end in 2025, but plans to remove the $10,000 limit on SALT deductions. He proposes not taxing overtime pay, tips, and Social Security benefits. Trump also suggests lowering the corporate tax rate from 21% to 20%, and even further to 15% for companies manufacturing in the USA.
Additionally, he aims to remove tax credits for green energy from President Biden’s plan. Lastly, he proposes new tariffs on imports—20% on most goods and up to 60% on Chinese products.
Fiscal implications
Trump’s tax plans are stirring up debate, especially with the TCJA’s key features set to expire in 2025. Extending these provisions could add nearly $4 trillion to the federal deficit by 2035. If you remove the SALT cap too, that figure could rise to over $5 trillion. This could be a big challenge for any administration trying to balance the budget without new revenue sources.
By reversing the SALT cap decision, Trump seems to be aiming to relieve higher-income earners in high-tax states. This could be a move to win over voters in areas that don’t usually support Republicans. It marks a shift from the party’s usual focus on fiscal responsibility and budget control. The TCJA, for instance, was originally about encouraging economic growth without adding to the national deficit.
Besides the SALT cap, Trump promises to cut taxes on tips and exempt overtime pay from taxes. This could help service workers and those who rely on overtime pay. These ideas reflect a focus on specific tax benefits rather than overall rate cuts.
A new tax situation for retirement planning
Another key part of Trump’s changing tax plan involves retirees. Many retirees rely on Social Security for their income after retirement, and removing the tax would reduce their financial burden. However, this might put more pressure on federal budgets since there are more retirees as the population ages.
The TCJA had previously increased the standard deduction, which helped many retirees by making it easier to file taxes without itemizing deductions. If the TCJA provisions expire, retirees might have to return to the more complex process of itemizing deductions. This could be difficult for those who benefited from the simpler filing process and larger standard deduction.
Trump’s idea to stop taxing Social Security has its benefits for those receiving it, but it might face pushback from lawmakers worried about the deficit. Doing this could cost a lot, about $1.2 trillion in lost tax revenue over ten years.
This raises questions on how to fund it without increasing national debt or cutting important services. Trump suggested tariffs might help pay for these cuts, but many doubt this approach as tariffs can raise prices for goods, canceling out tax cut benefits.
