The tax plan outlined by the Trump administration was an opening bid, but a slipshod and deceptive one that won’t much resemble anything that might be enacted.
Top officials pitched the plan, missing important specifics, as aimed at helping the middle class and creating lots more jobs, accomplished by slashing corporate taxes. It would simplify the code, collapsing seven brackets into three, and doubling the standard deduction mainly helping middle-income taxpayers. It would add trillions – as much as $7 trillion – to the deficit.
But it’s a bonanza for the well-to-do, including Donald Trump and his family. For the wealthiest, the top rates would be cut sharply; the tax on high-end investment income used to help fund health care would be eliminated, and it would kill the alternative minimum tax – which hit Trump, according to the only one of his tax returns that was leaked – and the estate tax, paid by only a handful of the very rich.
“This would be a tax cut for the middle income, but on the face of it seems very regressive as a lot of wealthy people would get a big tax cut,” notes Roberton Williams of the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.
Comparing this roll-out to the tax-reform bill enacted more than 30 years ago is instructive.
The Reagan administration spent a year drawing up a tax-reform plan in 1984, and then two of the most skillful Washington operatives, James Baker and Richard Darman, spent months consulting with lawmakers and affected interests before unveiling the specific plan.
By contrast, Trump, responding to cable-TV reports about his lack of accomplishments so far, ordered up a quick tax blueprint. There was only pro forma consultation with Congress and interest groups, and the effort will be directed by Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn, who have no experience in guiding complicated legislation through Congress.
The bottom line: Tax cuts may be enacted this year, as the plan is to do it without Democrats, but the corporate rate won’t be lowered all the way to 15 percent, given the specter of massive deficits. Some of the ideas the White House has suggested for broadening the tax base, like eliminating the deduction for state and local taxes, may face rough sailing, even with some Republicans.
The administration claims it will pick up a lot of revenue from a proposal to slap a 10 percent tax on un-repatriated foreign-source income. But that would only raise a one-time total of $250 billion, and Trump has talked about using that for an infrastructure plan. If instead the administration proposes to use the $250 billion as an offset to the tax cuts, it’s a drop in the bucket.
The plan reneges on numerous Trump campaign pledges: that his tax plan wouldn’t increase the deficit, that it would primarily benefit the middle class, and that the rich wouldn’t get much of a tax break. Further, while boosting the standard deduction, the White House wouldn’t say whether it might eliminate the personal exemption; if so, some large middle-class families might not get any tax cut.
The tax plan would be an addition to the list of other broken Trump promises, which include declaring China a currency manipulator, proposing a replacement for Obamacare that covers everyone, and having Mexico pay for a border wall.
A key provision in the plan would allow “pass through” entities – small businesses, partnerships, some wealthier individuals – to qualify for a top business tax rate of 15 percent instead of 39.6 percent. (Under the proposal for individuals, that 39.6 percent rate would be cut to 35 percent.)
“All Trump businesses probably are pass-throughs,” says Chuck Marr, the tax expert for the liberal Center on Budget and Policy Priorities. Unlike every other president for more than 40 years, Trump has not released his tax returns, though last year he promised he would. Democrats will insist he do this before any tax bill is passed.
But that may be brushed aside as Republicans now plan to do this under a process where they wouldn’t need Democratic votes. (This also means the tax cuts can’t be extended beyond 10 years.)
Mnuchin’s claim that these tax cuts will spur extraordinary economic growth and pay for themselves is a fantasy, belied by experience. This was the supply-side claim when Reagan cut taxes in 1981; Republicans spent the next four years increasing some taxes to offset the revenue loss. The same claim was made when George W. Bush cut taxes in 2001. That produced less economic growth than under Bill Clinton, who increased taxes.
When the only real tax reform was enacted in 1986, it was revenue-neutral and bipartisan. There may be tax legislation in this Congress, but it will be neither.