President-elect Donald Trump has pledged significant tax cuts, promising to put more money in Americans’ pockets. However, his plans may come with hefty consequences for the national budget. Here’s how his proposals could impact you.
1. Renewing the 2017 Tax Cuts
In 2017, Trump signed the Tax Cuts and Jobs Act, reducing tax rates for individuals, corporations, and estates. Most individual and estate tax provisions are set to expire at the end of 2025, but Trump has vowed to extend them if reelected.
- For middle-income households earning $60,000 to $100,000 annually, this could mean saving around $1,000 each year.
- For high-income earners, especially those making over $1 million, the extension could provide average savings of $70,000 annually.
While these cuts might ease taxpayers’ burdens, they come at a significant cost: extending the 2017 provisions could add over $4 trillion to the national debt over the next decade. So far, there’s no clear plan from Trump or Republicans on how to offset this expense.
2. “No Tax on Tips”
Trump has proposed exempting tips from taxation, a move that could impact about 2.5% of the U.S. workforce, primarily in service industries. Currently, many tipped workers earn too little to pay federal income taxes, but this change could still cause disruptions:
- Complicated tipping practices: Workers and businesses might adjust pricing or reclassify income to take advantage of the tax break. For instance, a service provider might reduce their standard rates and request the difference as a tip.
- Employer misuse: Some employers may reclassify workers as tipped employees to pay them a lower federal minimum wage, which is just $2.13 an hour for tipped workers.
The plan could also create a significant budgetary gap, potentially reducing federal revenue by $100 billion over 10 years.
3. Eliminating Taxes on Social Security Benefits
Another of Trump’s key proposals is to stop taxing Social Security benefits. This change would have a limited immediate effect, as only about 40% of Social Security recipients currently pay federal taxes on their benefits—primarily those with additional substantial income.
However, the broader implications could be severe:
- Funding challenges: A significant portion of taxes on Social Security benefits contributes directly to the Social Security Trust Fund. Eliminating these taxes could hasten the depletion of the fund, which is already under financial strain.
- Long-term risks: For younger generations not yet receiving benefits, this change could accelerate a funding crisis, threatening the future stability of Social Security.
The Bigger Picture
Trump’s tax-cut promises could bring short-term relief for some Americans, but they also carry risks of ballooning the national debt and undermining critical programs like Social Security. As the next administration prepares to take office, these proposals will likely be at the center of debates over fiscal policy and economic priorities.