Breaking Down Trump Tax Reform Plan

Main points:

  • On Wednesday 26th April 2017, President Donald J. Trump released the plan that “would give the biggest tax cuts in history” through Secretary of the Treasury Steven Mnuchin. The plan was very vague and lacking in details, covered one page and was in bullet points. 
  • The overarching theme of the plan seems to be relieving the wealthiest of their tax burdens while offering a little bit to middle-income families, although Mnuchin has said that there is no guarantee how it will impact middle-class families. The effect on the wealthiest 1% is all but assured.
  • Critics of the plan pointed out the most important question that the plan failed to answer and that the President and his advisers didn’t focus on: the funding. It will add approximately 4.5 to 6 trillion dollars to the US national debt, and that is a measurement that is not including all the possible effects of the tax cuts. 
  • The financial markets reacted with disappointment, as the major points had been known earlier. It seems like investors may soon lose faith in Trump and his administration, especially if a government shutdown occurs.
  • At this stage, it does not seem like the tax legislation will pass any time soon, unless they want to it to fail like with the Obamacare Repeal Plan. It has drawn overarching criticism from many Democrats and even some Republicans, who would be concerned about fiscal conservatism. 

The Elements of the Plan

  • From 7 Tax Brackets to 3 – top tax rate cut by nearly 5 percent.
  • Double Standard Deduction – intended to put more money in the pockets of the average taxpayers.
  • Repeal the Alternate Minimum Tax (AMT) which makes it harder for rich individuals to find loopholes and pay less. This system is what caused Trump to pay $31 million in his 2005 leaked tax returns.
  • Lower the Capital Gains Tax, cut from 23.8% to 20% percent and eliminates the 3.8% tax on investment income used to fund the ACA.
  • Repeal of Inheritance Tax – Again aiding the wealthy.
  • Eliminate all tax individuals except for those that relate to mortgage interest and charitable giving. State and local taxes would no longer be deductible, a concern for people in high-tax states (which were mostly Democratic in the recent election e.g. California and New Jersey).
  • Cut the Corporate Rate from 35% to 15%. This will reduce revenues by $2 trillion over 10 years and may not generate enough economic growth (like the administration claims) to cover for that.
  • No taxes on foreign profits – a contradiction on the President’s “America First” stance.

Not included: Any effort to be revenue-neutral (i.e. so that the deficit does not increase) with measures such as a border-adjustment tax.

Source: New York Times

Reactions

  • The proposal to double standard deductions was met with alarm by home builders and real estate agents, who fear it would decrease the incentive to purchase homes.
  • Democrats rejected “magical thinking behind the plan” [regarding economic growth would pay for the tax cuts] and condemned it as a giveaway to the rich disguised as a tax benefit to all Americans. They also want Trump’s tax returns, to see how much he personally would benefit.
  • The chief global economist at the Economic Outlook Group called the plan unimpressive and that the final plan will bear no resemblance to this one.
  • Critics also worry that individuals in partnerships could structure much of their personal income as business income, reducing the tax they would have to pay.
  • Republican lawmakers in Democrat-leaning states like NY, NJ and California, voiced opposition to the eliminiation of the state and local taxes deduction.

Source: NY TimesCNNBloomberg

Economic Growth and the Deficit

  • If Republicans embark on a plan to pass legislation that adds to the deficit and cannot be filibustered by democrats, Senate budget rules dictate that the tax cuts would expire after a decade.
  • Experts agree that lowering the corporate tax rate while broadening the tax base would make the tax system more efficient and boost economic growth and policymakers also believe that an overhaul is needed. But Trump’s plan does not identify a way to pay to pay for tax cuts.
  • According to Treasury Secretary Steven Mnuchin, the tax plan will pay for itself through faster growth, targeting 4% economic growth. However, predicting this is notoriously difficult and some dispute this theory.
  • The Committee for a Responsible Federal Budget estimated that the tax plan would cost between $3 trillion and $7 trillion over 10 years. Republicans are divided over deficit neutrality.
    • Against: It’s more important to spur economic growth, which has averaged only 2.1% over the last 5 years.
    • For: Keep federal deficit from increasing and make tax cuts permanent. (If tax cuts increase deficit, they are only temporary for 10 years).
  • Congressional aides warn the stimulative effect of cutting taxes will only increase projected revenues so much – not enough to cover the huge loss in revenue that would result.

Sources: The EconomistThe Hill

  • This should be a test for those Republicans who criticized President Obama for his policies that increased the federal deficit, keeping in mind that he inherited the worst financial crisis since the Great Depression.

 

Conclusion:

It is nearly impossible that the tax reform plan that may get passed by Congress will even remotely resemble this bare-bones plan put out by the current administration. Like healthcare or foreign diplomacy, tax reform is complicated and cannot be done with a single page of bullet points. I had to read dozens of articles to compile this information and even then it’s not enough.

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