Last night, President Trump’s 2005 1040 form (his tax return) was released to the public. From various reports, including the White House, the numbers contained in that report appear accurate. Assuming those numbers are accurate, let’s take a look at the taxes then “billionaire” businessman Donald Trump paid in 2005.
While you’ll see lots of stories touting the amount Trump paid in taxes, somewhere around $38 million, it is more informative to note the actual tax rate he paid which I’ll refer to as the effective tax rate. The top tax rate in 2005 was about 35%, but this rate only applies to income earned above $326,000. This means even if you make $500,000, your income tax as a percentage of income is about 31%. (all calculations derived from https://smartasset.com/taxes/virginia-tax-calculator#QmvdoR7JyL) Compare this to someone making $50,000 in 2005, the effective tax rate is about 18%. So even though the high earner is making 10 times as much income, their tax rate is only 13% higher. So President Trump paid around $38 million dollars on taxable income of approximately $150 million, for an effective tax rate of around 25%.
Note that an effective tax rate of 25% was only after imposition of the Alternative Minimum Tax. If that tax was abolished (as President Trump has advocated), he would only have paid approximately $5.3 million in income taxes, for a tax rate of less than 4%. We all know that the very wealthy pay less in taxes, on a percentage basis, than almost everyone, so why is this important?
For one, we often hear about how Social Security and Medicare are going broke. For someone earning close to the median income in Pulaski County ($46,000) or Town ($37,000) Social Security represent a significant amount of the overall tax bill at 6.2%. For higher earners, the amount is negligible, as Social Security taxes are capped at $118,500 in income in 2016 ($90,000 in 2005, for comparison). People like Donald Trump stop paying for social security at about 11 AM on January 1st. This means that the more income you earn, the smaller the amount Social Security makes up of your overall tax bill. For instance the $6,885 Trump paid in 2005 is only .0046% of his overall income. Some believe that we should completely abolish the cap on the Social Security Tax, but even a compromise position of doubling the cap amount (to say $250,000) would increase the lifespan on this important social safety net and mean a relatively small change in the tax rate for the wealthy.
Second, when discussing tax cuts we often hear much about how the marginal rates will go down. The Trump plan would consolidate the 7 current marginal tax rates to 3, of 12%, 25% and 33%. (http://www.businessinsider.com/who-will-save-money-lose-trump-tax-plan-2017-2) For the vast majority of taxpayers, much of the import of the proposed income tax changes comes down to what deductions and exemptions are changed depending on several factors. Single parents would likely pay more tax along with most families with children. The likely outcome for most tax filers in Pulaski would be a small drop in taxes or even an increase in taxes, especially if those taxpayers had children. In comparison, dropping the tax rate for the highest incomes from almost 40% to 33% would have the wealthiest Americans see an enormous 7% drop in their effective tax rates. If you were filing with, say, $150 million in income, that would mean an almost $10 million tax savings. Penalizing families with children while giving a massive tax break to the wealthiest Americans (mostly not in Pulaski) means that retaining and attracting young families with children would be even harder for places like Pulaski which already have relatively low wages.