How Donald Trump’s Tax Plan Will Effect Arts Workers: There’s Bad Stuff Coming

by Hannah Cole on November 15, 2016 Tax Time

It’s been a terrible week. Tuesday’s election of Donald Trump has already damaged  the emotional wellbeing of our country and its citizens. He will do much worse in the long term.

Most immediately, many of us are feeling wrecked. I include myself in that group. I had  envisioned taking my daughters to the inauguration of the first woman President, and assured them that a bully and an abuser would not be chosen by the American people. Not only will we not see the inauguration of the first woman President, but a bully and an abuser has been chosen by the American people. This is not the history I’d hoped my children would live through.

In the long term, it’s less clear what this means for us as a nation. There’s no way to predict the future, but if we want to see any kind of positive outcome we have to start organizing now. There are a lot of ways to participate. We can join protests, reach out to our neighbors. My weapon of choice, though, is to begin with the process of self-education. We can’t fight against powers we don’t understand. As a tax expert, I intend to help.

With the upcoming push for regressive tax legislation, it’s important to understand what’s being proposed and how it will affect us both as individuals and in the professional field in which we’ve invested our lives. Some of these changes may have a profound impact on both the high and low ends of the art market and non-profit sectors, so we need to be prepared.

Tax reform – specifically, supply-side theory-based tax cuts for the wealthy and for corporations – is the one thing that Trump and Congress currently agree on. Our House Speaker Paul Ryan is a self-proclaimed “tax wonk,” (and he has already announced his plan to privatize Medicare). Trump’s plan has shifted over the course of the election, and his campaign speeches contradict his proposed policies. He has suggested that he would let Ryan take over the detail. There’s some bad stuff coming.

The details will shift as the President-elect and Congress hammer out their differences, but for now, let me provide an outline, and my assessment:

Tax Cuts For Individuals

  • Trump’s plan would cut taxes for all income levels, but the largest cuts – both in dollars and by percentage – would go to the highest-income taxpayers, with people in the top 1% receiving 50% of the tax cut benefits.
  • The Trump plan proposes reducing the number of marginal tax brackets on earned income as well as on investment income, with rates lowered at all levels, but with the rates at the top lowered the most.
  • He would cap itemized deductions at $100,000 for single filers and $200,000 for married couples. He would raise the standard deduction from $12,600 to $30,000 for married filers and from $6,300 to $15,000 for singles, but eliminate personal exemptions (currently $4,050 per household member). The elimination of personal exemptions will effectively raise taxes for households with more than 2 children. To illustrate, a family of five pays no tax on their first $32,850 (which is the $12,600 standard deduction plus 5 personal exemptions of $4050). Under Trump’s plan, this family would get only the flat $30,000 standard deduction. The higher standard deduction is offset in large part by the elimination of the personal exemption, but will cause more households to take the standard deduction rather than itemize. Generally, a taxpayer only itemizes deductions when they have itemizable deductions that exceed the standard deduction. So under Trump’s proposed plan, a married couple now need $30,000 of itemizable deductions for this option to make sense, where before they needed anything over $12,600. This means that a greater share of households will no longer be eligible to deduct mortgage interest, charitable donations and real estate taxes. Will it reduce the amount of charitable giving? I don’t know. Many people donate to charities and get no tax benefit – but certainly those that do it only for tax reasons will reconsider.
  • His plan would eliminate the “head of household” filing status – (this is a filing status meant to benefit single or unmarried people who support a dependant – the current standard deduction is $9,250 for head of household, as opposed to $6,300 for a single filer) This move would effectively raise taxes on single parents.
  • He would eliminate the “net investment income tax” which is a 3.8% tax on net investment income, which currently affects only the top 2% of households. It was passed as part of the Affordable Care Act to help raise revenue to pay for Medicare. Cutting it would reduce taxes for the top 2%.

Corporate Tax Cuts

  • This is where Trump and Ryan’s plans differ the most. Both agree on cutting corporate tax, but from there they diverge. Trump’s main plan is to cut the corporate income tax rate to 15% – a dramatic slash – and include so called “pass through entities” in this cut. A pass-through entity is a corporate entity that doesn’t pay tax on the corporate (entity) level, but only pays tax as the income is passed-through to the individual who is a partner/owner, and they pay tax on it at their individual taxation rate. This applies to all S-corporations, Partnerships and Sole Proprietorships. It makes more sense when you are aware that a C Corporation (which is what all publicly-traded companies are, plus many large corporations) pay a double tax – they pay corporate tax, at the entity level, but they also pay tax on the individual level, when money is distributed to shareholders.

Eliminating Obamacare

  • This is outside of my scope of expertise, except insofar as ACA subsidies are reconciled on an individual’s tax return. But the issue affects the finances of the people on the middle and lowest rungs of the economy. The talk has been of getting rid of the Affordable Care Act – but the details on replacing it are sketchy and don’t add up. The chief proposal is replacing Affordable Care Act subsidies (the government paying for part of your healthcare) with Health Savings Accounts (you pay entirely for your own healthcare, but the money is sheltered from federal income tax). Experts such as William Julius Wilson, Professor at the Kennedy School for Public Policy at Harvard, say that Obamacare is key to addressing the needs of the lowest income Americans, especially those of color.

Elimination of the Estate Tax

  • Let me remind you why the estate tax exists. It is a tax on the wealthy. The theory goes that heavily concentrated wealth passed down from generation to generation stagnates the movement of money and creates a super-wealthy class. The estate tax aligns well with an American ideal of individual enterprise and equal opportunity. It acknowledges that if the country made great wealth possible for you (by educating you, protecting you, and letting you use its infrastructure) then upon your death, when you won’t feel it personally, you can repay some of your good fortune to repair and support that infrastructure. It is progressive, and it combats income inequality. The term “death tax” has been used to falsely imply that anyone who dies will be affected by it (and this is why I reject that term). Indeed, 99.8% of all inheritances in the US are tax-free. The estate tax affects you only if you are in the top .2% – when your estate is over $10.9 million (if married) or $5.45 million (if single). A more accurate name would be “the multi-millionaires’ tax.”
  • These tax cuts altogether would increase the deficit $6.2 trillion dollars over the next decade ($7.2 trillion, factoring in interest), according to the Tax Policy Center. And I’d like to note that the right wing is very quiet about deficits when the conversation is about cutting taxes. But once taxes are cut, as they are well aware, it is hard to re-implement them.  The cries of “deficit” get loud again when we talk about federal funding of healthcare, infrastructure and education. I see hypocrisy.

I’d like to remind us all of what paying taxes means for our society, and pause to think about what kind of society we value. Do we believe in a society that accelerates an increasingly removed class of the super-wealthy? Do we believe in a society where good healthcare and education enable economic mobility for the poor and middle class? Do we think it is right to sacrifice the latter for the former?

These tax changes will leave behind the very people Trump promised to help, and we need to hold him accountable. The supply side (aka “trickle-down”) theory that undergirds these cuts has been debunked. Since “Reaganomics” and the Bush tax cuts, income inequality has not shrunk but grown. Trump’s plan is a back door to cutting social programs by virtue of emptying federal coffers and will do little more than increase the wealth gap.

If the arts are important to the health of our culture, then we as cultural workers have a responsibility to participate more broadly. We must tell our local representatives that this plan won’t work for us. We must tell our state and federal representatives that this plan won’t work for us. And we must fight to have our best interests represented and won. It’s not always fun, but that’s the price of a functioning Democracy.

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