Saturday, October 21, 2017

The Trump Tax Plan

As a conservative, plans for lowering taxes automatically get my attention. President Trump has a plan for reforming the tax system and lowering taxes that should be taken very seriously, although his frequent claims to having "the votes" for it in Congress are as silly as most of his claims, as there is in fact no bill yet before either body.  I reproduce it in its entirety below, and you can download it here. All in all, it is a reasonable and straightforward plan, but it has some aspects that are better than others. I've worked some comments in among text that you can see--bolded and un-italicized.

The Goals Of Donald J. Trump’s Tax Plan

Too few Americans are working, too many jobs have been shipped overseas, and too many middle class 
families cannot make ends meet. This tax plan directly meets these challenges with four simple 

1.   Tax relief for middle class Americans: In order to achieve the American dream, let people keep 
more money in their pockets and increase after-tax wages.

2.   Simplify the tax code to reduce the headaches Americans face in preparing their taxes and let 
everyone keep more of their money. 

3.   Grow the American economy by discouraging corporate inversions, adding a huge number of new 
jobs, and making America globally competitive again. While I think that lowering the corporate tax rate is a net positive, Republicans tend to overstate the impact. 

4.  Doesn’t add to our debt and deficit, which are already too large. I have yet to see an analysis of this plan that does not project at least $1T in additional debt over 10 years. 

The Trump Tax Plan Achieves These Goals

1.   If you are single and earn less than $25,000, or married and jointly earn less than $50,000, 
you will not owe any income tax. That removes nearly 75 million households – over 50% – from the 
income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would 
otherwise owe income taxes will save an average of nearly $1,000 each. I am in principle, against people not paying anything in income taxes. I realize that wage earners pay a very regressive payroll tax--but those "taxes" are not for the continuing operations of the US government; rather they are for entitlements that the payer will likely participate in to an extent greater than what they paid in--even with interest. But--I think this is a lost cause.

2.   All other Americans will get a simpler tax code with four brackets – 0%, 10%, 20% and 25%
– instead of the current seven. This new tax code eliminates the marriage penalty and the 
Alternative Minimum Tax (AMT) while providing the lowest tax rate since before World War II. The elimination of tax brackets makes people think that there is a greater simplicity to the system, but when it comes down to it, when the form is filled out, we are only in one bracket at a time. So I don't get why this is such a big deal. 

3.   No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job 
to job, will pay more than 15% of their business income in taxes. This lower rate makes corporate 
inversions unnecessary by making America’s tax rate one of the best in the world. This one provision could comprise a great deal of the taxes actually cut. Again, the theory is that businesses paying less in taxes would apply at least some part of the savings to expansion and job creation. I personally would benefit from this provision as the owner of a sole proprietor business. 

4.   No family will have to pay the death tax.  You earned and saved that money for your family, 
not the government. You paid taxes on it when you earned it. As a conservative, I love this. As a pragmatist, this would be something I trade away in negotiations to get something that benefits more Americans.

The Trump Tax Plan Is Revenue Neutral

The Trump tax cuts are fully paid for by:

1.   Reducing or eliminating most deductions and loopholes available to the very rich. This is thought to include portions of the state income tax deduction. VERY RICH here means essentially those who itemize and who live in states with an income tax. 

2.   A one-time deemed repatriation of corporate cash held overseas at a significantly discounted 
10% tax rate, followed by an end to the deferral of taxes on corporate income earned abroad.

3.   Reducing or eliminating corporate loopholes that cater to special interests, as well as 
deductions made unnecessary or redundant by the new lower tax rate on corporations and business 
income. We will also phase in a reasonable cap on the deductibility of business interest expenses.

America needs a bold, simple and achievable plan based on conservative economic principles. This 
plan does that with needed tax relief for all Americans, especially the working poor and middle 
class, pro-growth tax reform for all sizes of businesses, and fiscally responsible steps to ensure 
this plan does not add to our enormous debt and deficit.

This plan simplifies the tax code by taking nearly 50% of current filers off the income tax rolls 
entirely and reducing the number of tax brackets from seven to four for everyone else. This plan 
also reduces or eliminates loopholes used by the very rich and special interests made unnecessary 
or redundant by the new lower tax rates on individuals and companies.

The Trump Tax Plan: A Simpler Tax Code For All Americans

When the income tax was first introduced, just one percent of Americans had to pay it. It was never 
intended as a tax most Americans would pay. The Trump plan eliminates the income tax for over 73 
million households. 42 million households that currently file complex forms to determine they don’t 
owe any income taxes will now file a one page form saving them time, stress, uncertainty and an 
average of $110 in preparation costs. Over 31 million households get the same simplification and 
keep on average nearly $1,000 of their hard-earned money.

For those Americans who will still pay the income tax, the tax rates will go from the current seven 
brackets to four simpler, fairer brackets that eliminate the marriage penalty and the AMT while 
providing the lowest tax rate since before World War II:

Income Tax Rate
Long Term Cap Gains/ Dividends Rate

Single Filers                  Married Filers                Heads of Household
0%           0%                           $0 to $25,000                  $0 to $50,000              
      $0 to $37,500
10%         0%                           $25,001 to $50,000         $50,001 to $100,000         
$37,501 to $75,000
20%         15%                         $50,001 to $150,000       $100,001 to $300,000       
$75,001 to $225,000
25%         20%                         $150,001 and up             $300,001 and up               
$225,001 and up

With this huge reduction in rates, many of the current exemptions and deductions will become 
unnecessary or redundant. Those within the 10% bracket will keep all or most of their current 
deductions. Those within the 20% bracket will keep more than half of their current deductions.

Those within the 25% bracket will keep fewer deductions. Charitable giving and mortgage interest 
deductions will remain unchanged for all taxpayers.

Simplifying the tax code and cutting every American’s taxes will boost consumer spending, encourage 
savings and investment, and maximize economic growth.

Business Tax Reform To Encourage Jobs And Spur Economic Growth

Too many companies – from great American brands to innovative startups – are leaving America, 
either directly or through corporate inversions. The Democrats want to outlaw inversions, but that 
will never work. Companies leaving is not the disease, it is the symptom. Politicians in Washington 
have let America fall from the best corporate tax rate in the industrialized world in the 1980’s 
(thanks to Ronald Reagan) to the worst rate in the industrialized world. That is unacceptable. 
Under the Trump plan, America will compete with the world and win by cutting the corporate tax rate 
to 15%, taking our rate from one of the worst to one of the best.

This lower tax rate cannot be for big business alone; it needs to help the small businesses that 
are the true engine of our economy. Right now, freelancers, sole proprietors, unincorporated small 
businesses and pass-through entities are taxed at the high personal income tax rates. This 
treatment stifles small businesses. It also stifles tax reform because efforts to reduce loopholes 
and deductions available to the very rich and special interests end up hitting small businesses and 
job creators as well. The Trump plan addresses this challenge head on with a new business income 
tax rate within the personal income tax code that matches the 15% corporate tax rate to help these 
businesses, entrepreneurs and freelancers grow and prosper.

These lower rates will provide a tremendous stimulus for the economy – significant GDP growth, a 
huge number of new jobs and an increase in after-tax wages for workers. I am ready to accept that a cut in the corporate rate and taxing pass-through businesses at a lower rate could lead to growth. 

The Trump Tax Plan Ends The Unfair Death Tax

The death tax punishes families for achieving the American dream. Therefore, the Trump plan 
eliminates the death tax.

The Trump Tax Plan Is Fiscally Responsible

The Trump tax cuts are fully paid for by:

1.   Reducing or eliminating deductions and loopholes available to the very rich, starting by 
steepening the curve of the Personal Exemption Phaseout and the Pease Limitation on itemized 
deductions. The Trump plan also phases out the tax exemption on life insurance interest for 
high-income earners, ends the current tax treatment of carried interest for speculative 
partnerships that do not grow businesses or create jobs and are not risking their own capital, and 
reduces or eliminates other loopholes for the very rich and special interests. These reductions and 
eliminations will not harm the economy or hurt the middle class.

Because the Trump plan introduces a new business income rate within the personal income tax code, 
they will not harm small businesses either.

2.   A one-time deemed repatriation of corporate cash held overseas at a significantly discounted 
10% tax rate. Since we are making America’s corporate tax rate globally competitive, it is only 
fair that corporations help make that move fiscally responsible. U.S.-owned corporations have as 
much as $2.5 trillion in cash sitting overseas. Some companies have been leaving cash overseas as a 
tax maneuver. Under this plan, they can bring their cash home and put it to work in America while 
benefitting from the newly-lowered corporate tax rate that is globally competitive and no longer 
requires parking cash overseas. Other companies have cash overseas for specific business units or 
activities. They can leave that cash overseas, but they will still have to pay the one-time 
repatriation fee.

3. An end to the deferral of taxes on corporate income earned abroad. Corporations will no longer 
be allowed to defer taxes on income earned abroad, but the foreign tax credit will remain in place 
because no company should face double taxation.

4.   Reducing or eliminating some corporate loopholes that cater to special interests, as well as 
deductions made unnecessary or redundant by the new lower tax rate on corporations and business 
income. We will also phase in a reasonable cap on the deductibility of business interest expenses.


So--in general, I think this is a good plan--but it if it were to find its way into an actual bill, it would not pass. And it would not pass for the very simple reason that because they pay the most in taxes, the rich would gain most of the benefit from this proposal. And as a matter of balanced books, it likely contributes to the national debt -- so you lose liberals and debt hawks. Additionally, virtually every Senate D would vote against this plan--and so the 52 Republicans in the Senate would each become the prancing ponies they have shown themselves recently to be, and will hold the bill hostage. No. I just don't think that this will pass.  But what would? What kind of a tax reform would garner enough D support? How about this one.

1. There are currently seven income tax brackets: 10, 15, 25, 28, 33, 35, and 39.6. Ninety-seven percent of American households are in the 25% or less brackets. Cut the tax rate in these three brackets by one or two percent. Will this result in a great boon to the treasury? No--but the political benefit of being able to state that 97% of Americans will have their taxes lowered would be considerable.

2. Implement all aspects of the Trump corporate tax scheme. Relentlessly tie this to estimates of jobs that would be created as a result.

3. Tie the percentage of deductibility of state income taxes to the tax bracket--i.e. the less you make, the more you get to deduct as a percentage. To toss the base some red meat, the highest earners in the high tax states (insert "liberal professional class" here) would not be able to deduct their state income tax at all.

4. Eliminate marriage penalty and AMT--these are blots upon the tax system.

Is this a sweeping reform of the tax code? Nope. Does it deliver upon the conservative desire to lower taxes? Yep. Most importantly, it outlines an approach that has a prayer of making it through a closely divided Congress. Trump needs a win on something, and this could be it. His plan is a good one, but it simply isn't acceptable in this political atmosphere.

It occurs to me that we seem to have lost the ability to value incremental change--and an incremental change is about all we can expect.


merighen said...

There are some potential "greater good" benefits to reducing or eliminating the ability to deduct state and local (property) taxes. Look at the states that are most vociferously protesting that change. I'm not an economist, I simply live in California. The same ideologues that can't build a bridge on time and on budget, who want to secede from the US and who thumb their nose at federal law will scream if property taxes and state income taxes wouldn't be deductible on federal tax returns. By their nature, that federal deductibility gives "cover" to ineffective, inefficient state and local government, because individuals in the highest federal brackets get the highest actual $$ reduction in the cost of State and local government. If people who are currently paying (as a rough example) 70 cents on the dollar for something, but suddenly must pay the full cost, perhaps their cost/benefit analysis of what they're paying for may change.

The Conservative Wahoo said...

Excellent point. But there are a lot of income tax states, and many of them send Republicans to Congress. It strikes me as a stretch that total elimination of the deduction is politically realistic in such a closely divided situation. Thanks for the comment.

Vaidro said...

I absolutely agree that everyone should pay some tax, even if the amount is next to nothing. For three years, I had an opportunity to observe two parks side by side in a South American country. The parks were identical in every respect, except one. One park had a coin-operated gate and the other was open. The coin required was the equivalent of a few cents. The open park was trashed; its neighbor was immaculate, not a speck of litter. The fee was so inconsequential that I deduced that the simple act of paying a token amount fostered a sense of pride, ownership, and responsibility. Why deny any U.S. citizen or resident the right to say, "I am a taxpayer"!

"The Hammer" said...

Well said Vaidro. Everyone must have SOME skin in the game or they don't feel a part of the game.

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