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Trump’s Tax Plan: The Good, the Bad, and the Not-that-Bad
Here are the highlights of Donald Trump’s tax plan, announced today, interspersed with a few comments from me:
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.
This is not a good idea. People who pay zero income taxes have little incentive to care about either how the government spends its money, or how much it spends. They have no incentive to vote for candidates who promise tax reductions, but they do to vote for candidates who promise spending increases.
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.
Simple is good. Few brackets are good. Even fewer would be better still. Why not 10% and 25% and leave it at that? Eliminating the AMT and the marriage penalty are terrific ideas, though hardly new ones.
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.
Business income tax rates should be low, but should they be lower than tax rates paid by employees? Why not similar rates regardless of how the income is earned?
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.
That’s all good.
Reducing or eliminating most deductions and loopholes available to the very rich.
Why not reduce or eliminate them for everyone? Why encourage rent-seeking by gaming the tax system? For example, why should senior citizens (I am one) spend so much of their resources lobbying for better tax treatment for themselves at the cost of harsher treatment for the young?
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.
This is difficult to evaluate. Why should income earned abroad and kept abroad be taxed by the United States at all? Do other countries do that? Is it just that it’s something to tax so we will tax it? What are the consequences for our trade relationships?
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.
The first part is quite sensible. But reducing the deductibility of interest expense should lead to less money being borrowed, and therefore less debt in corporate financial structures. If that is a good thing, then this is a good policy suggestion. But if it is a good idea, then why not go the other way and tax the paying of dividends the same as the paying of interest, which is to say, make them deductible? That way, decisions on capital structures will be based entirely on economic factors, not tax avoidance.
Published in Domestic Policy, General, Politics
What struck me most about Trump’s tax plan is its striking similarity to the tax plan of his supposed arch-nemesis, Jeb Bush.
Then again, we all know the real factors driving Trump’s popularity are his position on immigration and his attack dog demeanor – any other policies he might have are really just window dressing, at best. So the fact that he is essentially an “establishment squish” on every other policy won’t make a difference to anyone either way.
Fail the whole plan right here. If you make a dollar, you owe a nickle. Everyone needs skin in the game.
I was going to offer some econopolitical commentary, but Mendel already got it.
Good analysis MWA.
Considering how much Trump blusters about being the greatest, blah, blah, and bashes Jeb Bush this is right out of the Kennebunkport school of macroeconomic tax policy.
Yawn, low energy.
Trump knows tax plans put 95% of GOP voters to sleep, the rest are here commenting. He also knows he has to have one. Co-opting one that Jeb! or the establishment will find hard to argue with except at the margins is a very shrewd stroke.
So far, he understands messaging and media strategy better than the beltway banditos.
The key to this election is
1. Fix the border and runaway dilution of citizenship
2. Be perceived as someone who will put America first and be tough on foreign policy. Do not play state department wonk with names, dates and places.
3. Have a few specific things which people know will create jobs. Lower cost energy , bringing manufacturing home, getting regulations off our backs all work
4. Rebuild our military.
5. Fix the health insurance mess created by Obamacare without screwing the middle class. (I would tell the insurance companies to present a plan that works and present it to Congress. Any congressional staffer who opens their mouth gets shot.)
Please notice a tax plan, fixing entitlements and many others are not on the list.
Does his plan mention capital gains taxes at all?
I’ll endorse the Man With The Axe Plan.
The difficulty in any income tax scheme is not determining the amount of tax a person owes on income, it is determining the amount of income one has. Even a flat tax does not avoid this problem. Most small businesses are sole proprietorships, partnerships, or pass through entities where people file their business income on their personal taxes. The problem then becomes determining what one’s income actually was. Is my pickup a business expense, I need it for work but I also drive it home every night? Is that Christmas party I threw for my employees an allowable expense? Most of the “loopholes” that people talk about are these sorts of things.
Distinguish yourself from the field (in a good way) on a single issue. Make yourself indistinguishable from the rest of the field on everything else. You win on your signature issue, and you’re okay on everything else. Not a bad formula for victory.
What struck me about this tax plan was the rank populism involved. MWA nailed most of the analysis.
A few notes:
Why tax corporations at all? They are a legal fiction that don’t actually pay taxes anyway – consumers or investors do.
Why tax any foreign income, including that for individuals. The US is in an extreme minority of countries with world wide tax jurisdiction.
Some specificity on what is meant by “Corporate Loopholes” – when Obama made this same argument about “corporate jets” the deduction he was talking about eliminating was a broad one that a lot of corporations use for capital expenditures.
Trump also wants to eliminate the carried interest deduction because hedge funds. What most people don’t realize is that as a matter of tax law this would greatly affect certain times of business partner relationships where partners build capital in a business through “sweat equity”. So in he case of a man with a great idea who enters a partnership with an investor – the parter working to bring that idea to fruition would be subject to much more onerous taxation. What would the ramifications of eliminating the carried interest deduction for the hundreds of small businesses around the country that are the backbone of our economy?
Yeah, cutting it from 24-20% if I read it right.
I’m kinda with everyone. A lot of it is good, but the fact that 50% of households won’t pay anything really bothers me. I’m not sure what the numbers are now, but everyone needs to pay something, hence a flat or fair tax. Maybe we will get there some day.
I guess the plan violates Rob Long’s CoC with so many people having no skin in the game.
I don’t know. If we take citizenship seriously (and I do) and if we have an income tax for citizens (and we do), then I don’t see why it should matter where the income was earned. Citizens abroad should pay in just like citizens living here. It’s our country alike and we all need to pitch in regardless of where we’re living.
Would the corollary be that we then don’t tax non-citizens residing in the US?
What is amusing about all the “carried interest” talk from the past couple of weeks is that the talking points always mention hedge funds. The reality is, out of all the entities that have carried interest income, it is hedge funds that are the least likely to pay long terms capital gains on it. They hold many positions for less than a year so they pay long term capital gains on a significant amount of their carried interest. Those most affected is private equity and other forms of “sweat equity” partnerships.
I don’t like much of it and all above nail it, but then nobody likes my approach either, a flat tax linked to a uniform, no good or service excluded VAT like New Zealand’s vat.
As others have noted, taxing corporations is generally pointless as they function more as collectors rather than payers. Employees and customers bear the majority of the tax burden with shareholders bearing a relatively small portion.
As for the taxing for foreign income, very few countries other than the US do that anymore and it is generally a bad idea if not a totally counterproductive exercise. I don’t like the one time 10% hit on repatriation but might be a somewhat reasonable compromise. What is awful is that his plan doesn’t reform this system going forward moving to a territorial system where foreign income is never taxed in the US at all.
Further, his plan seems to get rid of the deferral concept so that foreign income is taxed in the US in the year it is earned rather than when it is repatriated. Now, this might be less of an issue as he is moving to a 15% tax rate so there is likely to be relatively little incremental tax owed in the US (assuming he is still providing a credit for foreign taxes paid), but this feature retains the completely unnecessary complexity of the current system.
This is partially correct. Those in these categories do pay taxes at a rate of 15% through FICA. And FICA is a general tax to be used by the government as it sees fit, not an insurance/pension plan as they’ve been told. If they understood this fact, they would damn well care about spending.
But they don’t understand it, and even if they did it would not affect their voting behavior.
Those who pay FICA taxes know that those taxes will not go up or down based on what the government spends elsewhere. If there is a government surplus or a trillion dollar deficit the FICA taxes will not change for that reason.
The main point is that such a person, paying FICA but zero income tax, has no interest in whether we have a tax code with high rates, low rates, complexity or simplicity, or loopholes for special interests. He doesn’t care if the government funds unnecessary wars, or funds cash for clunkers, or bails out the auto industry, or subsidizes ethanol. None of those decisions affects his taxes. Not his income taxes, and not his FICA taxes.
Not necessarily. Taxing citizens is a “we’re all on the same team with the same obligations” kind of thing. Taxing non-citizen residents is a “you’re enjoying the fruit of what we have set up so you should kick in while you’re here” kind of thing.
And why do you think almost no other nation adopts worldwide tax jurisdiction?
Also – have you considered the economic consequences or worldwide tax jurisdiction?
Also – the insane worldwide tax system of America has lead to the highest number of citizens renouncing their citizenship in history. So I guess some people don’t consider it worth pay for domestic profligacy when not enjoying the fruit of what we have set up.
Why does most of the rest of the developed world have a single payer health system? Consensus is not evidence of truth or desirability.
I don’t know what the economic consequences of worldwide tax jurisdiction might be. More accurately, I don’t know what the economic consequences of a shift in American tax policy away from worldwide jurisdiction might be. Nor do I know the budgetary impact. I suspect it’s all just guessing. The more basic question: do citizens owe taxes to support the government or not? Is there a shared responsibility among citizens or not? Should it matter that they’re living abroad?
Why should that bother me? People are free to renounce away. Good riddance.
It’s not like we’re facing a drain – quite the opposite.
If the American company makes money in, say, France, and pays French taxes, don’t they get tax forgiveness from the US?
I don’t like to see them paying twice, but it seems only fair that if they don’t have to pay taxes there, they should pay them here.
You can deduct the amount you paid to the government where you reside (or operate) from the income you report to the federal government.
Still, you’re getting taxed twice, just on a smaller overall amount.
There’s a credit too, not just a deduction. There’s also a foreign income exclusion.
This is correct.
And its all pretty complicated and annoying. And US citizens abroad receive next to no benefit for their taxes.
You don’t see much benefit to being a US citizen? Heck, the ability to immediately return to the US is a huge benefit alone.
One that is worth worldwide taxation?
Also, are you requiring a tithe for citizenship now?
Ah , an entire thread with only a few word bombs about a Trump proposal. This means the message strategy is working.
Trump knows damn well that taxes will be his ‘negotiation’ with congress where he expects to give as much as he gets. Since the tax code is the source of about a third of Congresses influence peddling for personal wealth, the ‘loopholes closing’ is the bomb inside this one.