The Trump administration on Wednesday shared its top priorities for tax reform and they are ambitious, including big cuts for corporations and high-income individuals, smaller benefits for middle class families, and a multi-trillion-dollar price tag likely to be financed through rising deficits.
Whether this mix of cuts and changes will win over lawmakers is unclear. But it doesn’t seem to align with the goals of leading tax reformers in Congress, who have been hoping to simplify the tax code and leave the long-term deficit untouched.
Instead, Trump’s clearest goal is to shrink Americans’ tax bills, starting with the personal income tax, which would be reorganized into just three tax brackets and reduced across the board.
His plan for business taxes is even more far-reaching. Not only would he cut the business tax rate from 35 percent to 15 percent, but he would also increasing the number of companies eligible for that new rate.
Currently, small partnerships and independent contractors don’t generally pay corporate taxes; they treat their business income more like a salary, including it with their individual income tax filings. But Trump wants to change that, applying the new 15 percent rate to these so-called pass-through businesses.
The big risk, however, is that you end up helping all the wrong folks. Rather than giving a tax break to scrappy small businesses, you encourage employees on payrolls to redefine themselves as independent contractors — and they’d get a big tax break. That’s exactly what happened in Kansas, after they passed a substantial tax break for pass-through businesses. It’s also worth noting that not all pass-through businesses are mom-and-pop shops. Some big corporations are organized that way, too, including Trump’s own business empire — which means, yes, that his tax cuts would likely boost his own bottom line.
Collectively, Trump’s tax changes would also be massively expensive. Together, the plan to lower the business tax rate and include pass-through businesses would cost something like $4 trillion over 10 years. And the lower rates for individuals only adds to the red ink.
As to how Trump plans to make up for all this lost money, his plan calls for closing some less-popular loopholes and offering business a one-time, reduced rate to bring their overseas profits back home. But that’s not nearly enough to offset the cost (and the tax holiday on foreign profits could actually cost money over the long term.)
The likely result, therefore, would be bigger deficits. And while this kind of deficit-funded tax cut can have economy-boosting benefits, it’s most effective when the economy is flagging. Right now, however, the Federal Reserve is actually tapping the brakes, for fear that the US economy could overheat.
So while some businesses might use Trump’s proposed tax cuts to hire workers or expand operations, the overall effect would be held in check by the Fed’s commitment to raise interest rates and restrain economic growth.
That’s bad news for middle class families hoping for significant trickle-down benefits. And otherwise the benefits for those families are relatively small — certainly compared to the gains that will flow to upper-income Americans.
One middle-class boon would be Trump’s plan to double the standard deduction. But given that nearly half of US households already pay nothing in federal income taxes, this proposal won’t reach far down the income ladder.
Separately, Trump has seconded his daughter Ivanka’s call for child-care tax credits, but the details matter a lot and earlier versions have been tilted toward wealthy parents.
And when you place these beside some of the provisions geared towards the wealthy, the contrast is particularly stark. Among other things, Trump wants to repeal the estate tax — which only affects the very richest — and eliminate the alternative minimum tax, which is specifically designed to ensure high-income households pay a reasonable share.
Put it together, and Trump’s tax package seems singularly unfit for success on Capital Hill. Republicans in the House have been rallying behind a totally different banner — not huge tax cuts, but revenue-neutral tax reform.
Their hope was to simplify the tax code, lower rates, eliminate loopholes, blunt the appeal of tax havens, and leave the long-term deficit unchanged. But only the “lower rates” part shows up in the Trump plan.
And while Senate Republicans have been less dogmatic than their House counterparts, they too need a plan that’s deficit-neutral — at least over the long term. That’s an absolute requirement, if they want to use the fast-track rules that would allow them to avoid a filibuster. Yet, Trump’s plan doesn’t seem to work. Even a temporary corporate tax cut would shift business behavior enough to cause long-term revenue losses, according to the Joint Committee on Taxation.
In the end, this may be the most surprising feature of Trump’s new plan — namely, that it looks so much like his campaign plans. Despite nearly 100 days in office, and the remarkable collapse of his first attempt to repeal the Affordable Care Act, Trump’s White House team still isn’t adapting its plans to survive the harsh realities of Washington lawmaking.Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz