A recent Bloomberg analysis of the comprehensive tax legislation enacted by President Trump reveals a fundamental shift in how Americans will be taxed: 

• Tax liability will increasingly depend not on income levels, 
• But on the source of earnings, 
• Geographic location, 
• And personal circumstances

This new Republican legislation marks a significant departure from the traditional conservative goal of tax code simplification. Previous GOP leaders championed streamlined approaches – Steve Forbes promoted a flat tax system in the 1990s, Herman Cain advocated for his “9-9-9” plan in 2012, and the 2017 Tax Cuts and Jobs Act eliminated numerous special provisions while creating targeted benefits for business owners and investors.

The current $3.4 trillion package takes the opposite approach, dramatically expanding the number of categories eligible for preferential tax treatment. The legislation preserves and enhances the 2017 law’s advantages for investors, business proprietors, and wealthy inheritors, while introducing an array of new deductions covering tips, overtime pay, automobile loan interest, and targeted relief for seniors, parents, and specific industry sectors.

This represents a philosophical pivot from tax simplification toward a more complex system of specialized incentives and carve-outs. Rather than creating a more uniform tax structure, the new law establishes multiple parallel tax systems where individuals with similar incomes may face vastly different effective tax rates based on their employment type, investment activities, and personal situations.

The result is a tax code that prioritizes targeted relief over structural coherence, creating what amounts to different tax regimes for various types of economic activity and personal circumstances.     

Tax expert Andrew Zylka, a principal at accounting firm UHY, captured the legislation’s complexity in his assessment to Bloomberg: “Nothing in this bill screams simplification; it’s really adding in more things you need to worry about when you’re filing your tax return.” 

This complexity means that regardless of whether someone earns $100,000 or $100 million, their effective tax rate can vary dramatically from their nominal bracket depending on their circumstances.

The source of income has become the primary determining factor. While the legislation includes high-profile provisions like tax breaks for tipped income and overtime pay that Trump championed, these come with significant restrictions – they don’t apply to payroll taxes and sunset after four years.

More substantial from an economic perspective are the permanent benefits targeting affluent taxpayers. These higher-end tax advantages, now made permanent under the new law, represent a far more significant long-term fiscal commitment than the temporary relief for wage earners.

The result is a tax system where two individuals with identical incomes could face vastly different tax burdens based solely on whether their money comes from wages, tips, investments, business ownership, or other sources. This represents a fundamental shift from income-based taxation toward a system where the nature of economic activity drives tax liability.

Targeted Tax Advantages

The legislation preserves and expands several high-value provisions benefiting affluent taxpayers and investors. The lucrative 20% deduction for pass-through business entities, initially created in 2017 and set to expire, becomes permanent while maintaining its exclusions for wealthy professionals in legal, financial, healthcare, and consulting services.

Private equity managers will continue benefiting from preferential tax treatment through the carried interest provision. This longstanding loophole allows them to pay capital gains rates rather than ordinary income taxes on their investment management fees. This represents a reversal from Trump’s previous campaign promises to eliminate this advantage.

The legislation also enhances benefits for venture capitalists and startup entrepreneurs through an expanded qualified small business stock (QSBS) exemption. This provision allows investors to exclude millions of dollars in gains from taxation when they sell qualifying startup equity, providing substantial tax relief for those participating in early-stage company investments.

These permanent provisions create a stark contrast with the temporary nature of many middle-class tax breaks in the same legislation. While wage earners see time-limited relief on tips and overtime pay, investors and business owners secure lasting advantages that compound over time.    

The new law significantly raises the cap on state and local tax (SALT) deductions from $10,000 to $40,000. This change particularly benefits wealthy residents in high-income tax states and homeowners with substantial property taxes. However, the $40,000 cap begins to phase out for taxpayers earning over $500,000 annually, and it reverts to $10,000 starting in 2030. Interestingly, pass-through businesses can bypass this cap entirely, continuing to deduct their full SALT through state-level workarounds.

For 112 years, politicians have often complicated the federal income tax with special provisions. In contrast, a bipartisan reform law in 1986 radically rewrote the code, removing many exemptions and deductions while lowering rates so that investors, workers, and others generally paid similar tax rates.

The result reinforces a two-tiered tax structure where the source and structure of income – rather than the amount – increasingly determines tax liability. Business owners, private equity professionals, and startup investors operate under fundamentally different tax rules than traditional employees, even when their economic returns are comparable. 

However, lawmakers subsequently began reintroducing targeted incentives to benefit specific constituencies and promote desired economic activities. Among the most significant is the preferential treatment for investors, who pay substantially lower rates on long-term capital gains compared to workers’ wage taxes. While Democrats during the Biden administration attempted unsuccessfully to narrow this disparity by raising investment taxes on high earners, they did secure hundreds of billions in new clean energy tax incentives.

‘Gradual Expansion’

Over the years, the tax code has gradually incentivized certain types of income or certain types of behavior more. 

The architects of the 2017 legislation, including then-House Speaker Paul Ryan, aimed initially for dramatic simplification – envisioning most Americans could file returns on a postcard-sized form. In some respects, they achieved meaningful progress.

By eliminating numerous itemized deductions while substantially increasing the standard deduction, tax preparation became markedly simpler for millions of filers. The percentage of Americans claiming the standard deduction rather than itemizing on detailed forms rose dramatically from 68% in 2017 to 88% by 2021.

Yet this simplification primarily benefited middle-class taxpayers with straightforward financial situations. Meanwhile, the tax code’s complexity has intensified for those with diverse income streams, business interests, or investment portfolios – precisely the groups now navigating an expanding array of specialized provisions, exemptions, and preferential rates based on how they structure their economic activities.

The result is a bifurcated system: streamlined filing for wage earners, but increasing sophistication required for those whose income derives from multiple sources or non-traditional arrangements. 

The coming tax year promises increased complexity for many filers. The elevated SALT (state and local tax) deduction cap will incentivize millions of Americans to return to itemizing rather than taking the standard deduction. Additionally, even provisions that don’t require itemization – such as the new tips and overtime deductions – will demand additional documentation and record-keeping.

Beginning this year, taxpayers can claim up to $10,000 annually in auto loan interest deductions through 2028, but only for vehicles with final assembly in the United States. The IRS must now establish verification procedures for taxpayers to demonstrate their vehicles meet this requirement.

Many new tax breaks include income thresholds and eligibility caps, meaning qualification determinations may require sophisticated calculations accessible only through specialized tax software. According to projections from the nonpartisan Penn Wharton Budget Model, the legislation’s benefits are unevenly distributed: the lowest-earning 40% of Americans will experience net losses over time, middle-income households will see minimal impact, while those earning between approximately $400,000 and $1 million will receive the largest gains – a median 2.9% increase in after-tax income by 2030.

These figures represent averages that can fluctuate significantly based on individual circumstances. Research from Yale University’s Budget Lab examining “horizontal equity” – whether taxpayers with comparable incomes face similar tax burdens – concluded that the new legislation reverses “around half of [the 2017 law’s] progress” toward achieving more equitable treatment among similarly situated taxpayers.  

Conclusion 

The result is a system where identical earners may face dramatically different effective tax rates depending on their specific circumstances, employment arrangements, and ability to navigate an increasingly complex web of specialized provisions. If you have any questions about how these new tax laws will affect your situation, don’t hesitate to contact Huckabee CPA for a free consultation.