President Trump is floating the idea of increasing taxes on the ultra wealthy who make $2.5 million annually from 37% to 39.6% to cover areas like immigration and military without cutting Medicaid. On a call with House Speaker Mike Johnson on May 7, Fox News reported the president pushed the notion, but has since sent mixed messages.
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In a May 9 Truth Social post, Trump said he would be willing to accept a small tax hike for wealthy individuals if it would benefit lower- and middle-income workers. However, he criticized Democrats for opposing the idea. Trump also remarked that Republicans might be better off avoiding such a measure, though he indicated he would not object if they went ahead with it.
It’s unclear which way things will go, but Trump is considering the idea and experts weigh in how it could affect the economy, what millionaires really think about the tax increase, who will benefit and if it makes sense to tax the rich more.
How the Tax Hike Would Impact the Middle Class
Trump has stated the tax increase on the wealthy would benefit lower-wage earners and finance expert Andrew Lokenauth said it would give middle class households an extra $2,000 to $3,000 a year.
“From my calculations and work with high-net-worth clients, the biggest winners would be middle-class workers and retirees,” he explained. “The proposed elimination of taxes on tips, overtime wages and Social Security benefits would put real money back in working folks’ pockets.”
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Service Workers Will See a Big Impact From Trump’s New Tax Initiatives
While much of the middle class will only see a small savings, service workers will experience a big boost thanks to Trump’s “No Tax on Tips Act” which is a huge win for the service industry, according to Peter Diamond, licensed tax, accounting, real estate and structure and certified bankability expert.
Trump’s tax initiative will allow “tipped workers earning under $160,000 to exclude up to $25,000 in tips from federal income tax,” Diamond explained. “That’s real money back in the pockets of servers, bartenders, salon pros — people who actually make the economy move day to day.”
But hospitality employees aren’t the only ones who benefit. It’s good for businesses too because the tax initiatives will “bring back 100% bonus depreciation,” Diamond explained.
“That means construction companies, small businesses and real estate investors can write off qualifying assets in full the year they buy them — vehicles, equipment, even buildings,” he added.
Job creation and growth could happen as a result, according to Diamond.
The Actual Impact of Raising the Tax Rate to 39.6%
While some predict a surge in jobs, not everyone believes that will happen if the tax rate hits 39.6% for the wealthy, which would only affect 0.1% of Americans.
“Based on my experience working with high-net-worth individuals, the actual impact on job creation is way overblown,” Lokenauth said. “Most business expansion decisions are driven by market demand, not personal tax rates.”
Grover Norquist, president of Americans for Tax Reform also doesn’t believe job growth will happen if the tax hike goes into effect. Norquist told NBC News, that Trump spoke with him to ask his opinion of the proposal and that he pushed back.
Norquist gave the outlet his reasons for believing that talking about raising rates was a bad idea, citing that it would lead to job losses, hurt small businesses and saying it was never considered as an option by anyone in the campaign.
How This Could Affect the Broader Economy
If the middle class spends the savings from the proposed tax hike and pumps it back into the economy, it could make a difference.
“When middle-class folks get extra cash, they tend to spend it locally,” Lokenauth said. “That increased consumer spending typically generates more jobs than tax savings for the ultra-wealthy and the proposed changes could inject about $400 billion into local economies over five years.
The Divide Within the Republican Party
Many Republicans are not on board with raising taxes and have publicly spoken out against Trump’s idea.
“I don’t want to see taxes go up on anyone. But the president, he’s not a conventional president. People didn’t vote for a conventional president and I think his policies reflect that,” said Senate Majority Leader John Thune on the May 9 episode of CNBC’s “Squawk Box.”
Lokenauth is also hearing there is a “clear split” from his discussions with Republican lawmakers.
“The traditional wing — and I’ve worked with many of them — stick to the ‘job creators’ argument. But the populist wing sees the math differently. One lawmaker (keeping his name private) told me, ‘A 2.6% increase on multimillionaires to fund middle-class tax cuts seems like a fair trade,” he said.
What Wealthy Individuals Really Think About the Tax Increase
The tax increase could give others a break while stimulating the economy and Diamond doesn’t believe the jump in taxes would matter much to the ultra rich.
“It’s a headline grabber, but the impact is minimal in practice,” he said. “Between business deductions, depreciation and smart structuring, most high earners won’t feel it.”
Lokenauth has had conversations with a few of his clients who would be affected and aren’t opposed.
“One client worth $10 million plus told me, ‘The rate increase would cost me about $75,000 annually — that’s meaningful but won’t change how I run my businesses.’ Some even support it, viewing it as an investment in economic stability,” he explained.
How Taxing the Rich Makes Sense When They Create Jobs
Trump’s proposal could make a difference to lower-wage earners, but is a tax hike fair to the wealthy who create jobs?
“This isn’t a broad tax hike on entrepreneurs; it’s a narrow one targeting ultra-high earners. At the same time, the plan loads up on pro-business incentives — bonus depreciation, expanded deductions and more,” Diamond explained.
He believes the trade off of taxing a few to help the masses could work if the structure is right.
4 Types of People Who Really Benefit
If implemented correctly, the proposed tax increase could help several types of people. According to Diamond, here’s who will reap the benefits.
- Tipped Workers: Up to $25,000 in tips stays untaxed. That’s money back in people’s pockets immediately.
- Construction and Trades: Bonus depreciation fuels projects, hiring and equipment upgrades.
- Small Business Owners: With new write-offs and incentives, they can scale and reinvest faster.
- Real Estate Investors: The return of full expensing and potential cost segregation boosts cash flow and return on investment (ROI).
A Widespread Tax Cut
In order to extend the 2017 Tax Cuts and Jobs Act (TCJA) and pay for Trump’s other initiatives like getting rid of taxes on tips and overtime wages, as well as protecting Medicaid and Social Security, money needs to come from somewhere to cover Trump’s priorities.
“This isn’t a one-lane linear tax cut. It’s built to benefit working-class earners, builders, business owners and long-term investors — the people actually moving the economy forward,” Diamond said.
Lokenauth also believes the numbers don’t lie and the plan could work by “reducing the deficit impact of the broader tax package by $150 to 200 billion over 10 years. That’s significant savings while still delivering meaningful relief to working families.”
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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