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As the election creeps closer, everybody's least favorite April activity is taking the spotlight: Figuring out how much they'll need to pay in taxes.
Former president and current GOP nominee Donald Trump has proposed a slew of changes to taxes and tariffs — but there are concerns his plan will have an uneven impact on Americans of different income levels.
According to a new analysis from the Institute on Taxation and Economic Policy — a left-leaning think tank — Trump's tax and tariff proposals could spur an average tax cut of about $36,300 for the richest 1% of Americans, or those with incomes of $914,900 and above. Beyond that, ITEP expects the next-richest 4% to receive an average tax cut of about $7,200.
On the other side, the lowest-income quintile of Americans could see a tax increase of roughly $800 when factoring in how the tariffs would affect household costs, ITEP data show.
"It would be a dramatic shift of the burden from the top down to the middle and the bottom," Ernie Tedeschi, the director of economics at the Yale Budget Lab and former chief economist at the White House Council of Economic Advisers, said of Trump's plan.
The looming expiration of former President Trump's 2017 TCJA tax law sets up a big fight next year over whether or not to extend those tax cuts in part or in full. Trump's proposals include eliminating taxes on tips and overtime, extending the 2017 tax cuts for individuals, implementing higher tariffs on imported goods, and reducing the corporate tax rate.
While the tariffs would likely hit households across the income spectrum, ITEP's analysis suggests that extending and even increasing the 2017 tax cuts for the highest earners would more than offset those costs, leading to a net boon for the top 5%.
Matthew Gardner, a senior fellow at ITEP, explained how the think tank estimated the effects of tax and tariff changes on US taxpayers during a Monday call with reporters. Gardner said that the analysis used a computer model based on actual federal tax returns from the IRS to make estimates. Since some of Trump's proposals, like tariffs, have no direct connection to income tax, Gardner said ITEP's team worked extensively with data from other governmental sources, like the Bureau of Economic Analysis, using similar techniques to other analyses of how tariffs affect households.
Notably, the analysis assumes the 2017 tax cuts will be extended — but Trump has previously claimed he would reverse the $10,000 cap on deducting state and local taxes, so ITEP's analysis included that reversal in their estimates, which further skews the benefits of the tax proposals to the top of the income ladder.
Other studies have found similar potential impacts from the proposed tariffs on US families. An analysis from the left-leaning Center for American Progress found that Trump's proposals to impose tariffs across all imports could result in a $1,500 tax increase for the typical American household, something that would disproportionately impact those with lower incomes.
Casey B. Mulligan, the former chief economist for the White House Council of Economic Advisers under Trump and a current adviser at the right-leaning America First Policy Institute, estimated to the Washington Post that a 10% tariff proposal could lead to an additional percentage point in inflation. Meanwhile, the Tax Policy Center has found that the policies would bring down post-tax incomes by $1,800 in 2025.
Trump has still maintained that tariffs would not harm US consumers but rather raise prices for other countries. He said during a speech in August that "I am going to put tariffs on other countries coming into our country, and that has nothing to do with taxes to us. That is a tax on another country,"
When it comes to Trump's other tax proposals, like eliminating taxes on tips and overtime pay, the ITEP analysis found the proposal would help higher-income Americans over those who are lower-income, largely because a significant number of tipped workers don't make enough money to pay income tax and would not benefit from changes to the payment structure. Joe Hughes, a senior analyst on federal tax policy at ITEP, previously told BI that high-wage workers could take advantage of Trump's proposals to make more money.
"A lot of lawyers are working 60, 70 hours a week, right? So why not reclassify yourself as a wage employee, then you get to take advantage of overtime rules and not pay taxes on it," Hughes said.
Brian Hughes, the Trump campaign's senior advisor, told BI in a statement that "President Trump's historic tax cuts laid the foundation for robust, non-inflationary growth that fueled more revenue for the federal government, not less."
Ultimately, though, any tax proposals would need buy-in from the House and Senate. As with the top-line presidential race, the fate of both chambers of Congress is uncertain, and should Trump face a Democratic House or Senate, he may have trouble pushing an aggressive tax agenda through.
