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The startlingly brief, one-page tax plan that U.S. President Donald Trump produced on April 26 is, if not the elusive conservative dream of tax-return-on-a-postcard, certainly tax-proposal-on-a-postcard. But the outline, together with the proposals released during the presidential campaign, suggest the most sweeping tax cuts for the rich in the nation’s history. Former Presidents Ronald Reagan and George W. Bush were pikers in comparison.
During the presidential campaign, preelection polls showed that 51 percent of Trump supporters wanted him to raise taxes on the rich, but the current proposal drastically cuts taxes at the top while decimating federal revenues. It is difficult to know by how much precisely, as the plan declines to reveal what income levels would fall under the three simplified tax brackets—ten, 25, and 35 percent—that would replace the current seven, among other details. But analysis from the Tax Policy Center, a nonpartisan think tank, of Trump’s campaign tax proposal, which is similar to his current plan but slightly more detailed, revealed a total tax cut that would be somewhat larger than the Bush tax cuts of 2003–04, with the top one percent getting over half of the total reductions, compared to just one-quarter under Bush. Meanwhile, ordinary taxpayers are in for some nasty surprises.
At the top of the income spectrum, the proposal rolls back former President Barack Obama’s progressive tax changes. He had raised taxes on high earners, returning the top-two individual income tax rates to 35 and 39.6 percent, from the 33 and 35 percent secured under former President George W. Bush’s tax reforms, and imposing a 3.8 percent capital gains surcharge and additional 0.9 percent Medicare tax on those earning over $250,000 to help finance the Affordable Care Act. Trump’s plan would return the top marginal income tax rate to 35 percent and eliminate the higher capital gains and Medicare taxes on top earners. The budgetary implications are significant. The reduction in the healthcare-related taxes would rob Obamacare and Medicare of $275 billion over the next ten years according to the Joint Committee on Taxation. The elimination of the extra Medicare tax alone would accelerate the insolvency of the Medicare hospital insurance trust fund by three years, from 2028 to 2025.
The Trump proposal also zeroes out the estate tax, which because of a large, inflation-indexed exemption only affects 0.2 percent of all decedents to begin with (about 4,000 people out of 2.5 million annually). Gone, too, is the Alternative Minimum Tax, originally adopted to prevent the rich from paying too little. Currently, the AMT collects just over two percent of individual income tax revenue and is widely seen as flawed, as it now hits a greater share of the merely affluent than the truly rich. Nonetheless, according to Trump’s leaked 2005 tax return, the AMT forced him to pay $31 million in federal taxes that he could have otherwise slimmed down through a variety of deductions. Thus, eliminating the AMT is still a boon to those at the top of the income spectrum.
These changes are all standard conservative fare. The real novelty—and an additional huge revenue hit—comes from reducing the top corporate tax rate from 35 to 15 percent and letting small businesses known as “pass-throughs” or S corporations, which are currently taxed in the individual tax system, enjoy the 15 percent corporate rate as well. You can bet every American above the bottom bracket who can possibly channel their earnings into self-employment income will do so—especially high-income professionals. According to the Tax Policy Center, currently 60 percent of all pass-through income is reported on tax returns from households making more than $500,000. Under the Trump reform, they’d see their marginal rate drop from 39.6 to 15 percent.
Are these tax cuts affordable? One way to minimize the impact of lower tax rates is to “broaden the base” by eliminating tax breaks for corporations and individuals, along the lines of the 1986 Tax Reform Act under Reagan. The Trump proposal does promise to scrap “tax breaks for special interests” on the business side and “targeted tax breaks that mainly benefit the wealthiest taxpayers” on the individual side. The proposal does not specify which “special interests” will see their tax breaks eliminated, mentioning only that the deductions for home mortgage interest and charitable giving will be retained. Critics of the extensive tax breaks in the current system might celebrate. These loopholes reduce federal revenues by more than $1.2 trillion per year—more than the amount actually collected by the individual income tax—and are in fact slanted toward the affluent (including the home mortgage interest and charitable giving deductions slated for retention). That said, actually eliminating tax breaks is extraordinarily difficult to do, as each is typically backed by powerful stakeholders. For example, health insurers and providers have an extremely strong stake in employer-provided health insurance and would fight against the elimination of the tax break on insurance premiums. Corporate interests likewise have a strong stake in the various business tax breaks that riddle the system, and the means to lobby against their elimination. It is much easier, politically, to cut rates without eliminating tax breaks, resulting in lower rates on the same narrow tax base. But as economists William Gale of the Brookings Institution and Andrew Samwick of Dartmouth College have shown, such “standalone” tax cuts raise the federal budget deficit and therefore interests rates, reducing national savings, investment, and growth.
In fact, the negative impact of what are likely to be standalone tax cuts on economic growth undercuts the other argument for tax cut affordability. When introducing the tax reform outline, Treasury Secretary Steven Mnuchin argued that economic growth would make the tax cuts revenue neutral. But whether tax cuts boost economic growth in accordance with “supply-side” theory is an extremely complicated and contested matter. Such tax cuts didn’t work before: the supply-side tax cuts of 1981 were followed by large tax increases in 1982 and 1984 after the tax cuts failed to boost economic growth and budget deficits rose. With the Committee for a Responsible Federal Budget estimating that the Trump proposal would reduce federal revenue by between $3 trillion to $7 trillion over the next decade, the economy would have to grow at double today’s rate to make the plan revenue neutral, a growth rate not seen in the United States in a sustained way since the 1960s. In the absence of such spectacular and unlikely growth rates, the national debt will increase dramatically, to nearly double today’s level.
In the meantime, the Trump proposal has serious implications for both states and ordinary taxpayers. The proposal eliminates the federal tax break for state and local taxes. This is a big kick in the teeth to states with progressive tax codes where higher taxes on the affluent have been cushioned in the federal tax code, which allows such taxes to be itemized and deducted from federal taxable income. This particular proposal has a partisan cast because states with progressive tax codes are typically blue states. If this tax break disappears, governors of liberal states may feel pressured to reduce the progressivity of their state income tax systems and raise other kinds of taxes (49 states have balanced budget requirements), possibly harming lower-income taxpayers.
For ordinary taxpayers, the 90 percent plus who will likely fall in the bottom and middle-income brackets, the Trump proposal offers fairly bad news. The small bit of good news is that the plan doubles the standard deduction, which is beneficial since most people don’t itemize their deductions. The current proposal also leaves the bottom tax rate at ten percent—Trump’s campaign proposal had raised it to 12 percent. But Trump’s campaign proposal eliminated the head of household filing status, raising taxes on single parents. More surprising, the campaign proposal eliminated personal exemptions, which under current law reduce taxable income by $4,050 per household member, thus possibly increasing taxes for larger families. The new proposal does include Ivanka Trump’s broadened tax credits for child- and childcare costs, a provision that acknowledges the large share of working mothers at all income levels, but which also, interestingly for a proposal coming from a Republican administration, penalizes traditional families in comparison with dual-earner families.
But the biggest surprise of all for ordinary taxpayers may be the enormous slant in the tax cuts toward the rich. The Tax Policy Center estimated that under the campaign’s tax proposal, the top 0.1 percent would enjoy an average tax cut of $1.1 million (14.2 percent of after-tax income), those in the middle quintile would get an average cut of $1,010 (1.8 percent of after-tax income), and the bottom quintile a mere $110 reduction (0.8 percent of after-tax income). Similarly, the bottom line of the current plan is that the rich fare far better, both absolutely and proportionally, and that Trump essentially dumps on his base of supporters.