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
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  1. Ed G. Member
    Ed G.
    @EdG

    Jamie Lockett:

    Ed G.: 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?

    No, I’m expecting that as citizens we share the responsibilities of citizenship. The amount and method of satisfying that responsibility is up for debate, but the responsibility exists no matter where one lives.

    As far as whether the ability to re-enter the US is worth worldwide taxation, that isn’t a factor for me. I was only suggesting it for your consideration since you couldn’t conceive of a benefit to US citizenship for those living abroad. I already said that for me it’s a matter of the responsibility of citizens to contribute just like the rest of the citizens. If I were in that situation, though, I would think of it as a huge benefit.

    • #31
  2. J. D. Fitzpatrick Member
    J. D. Fitzpatrick
    @JDFitzpatrick

    Man With the Axe:

    Theodoric of Freiberg: 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.

    Speaking of which, in my own land of rainbows and unicorns, I like the idea of pegging some element of the tax rate to the government deficit. Say the govt wants to run a deficit of 10%; people pay more tax. Say the govt eliminates the deficit; people pay less tax.

    • #32
  3. Ed G. Member
    Ed G.
    @EdG

    anonymous:

    Ed G.: Why should that bother me? People are free to renounce away. Good riddance.

    Renunciation of U.S. nationality is not free. Starting in January 2015, the fee for renunciation of citizenship is US$2350, plus a possible expatriation tax which marks to market all assets owned by the individual renouncing citizenship.

    This allows one to place a precise financial value on U.S. citizenship: US$-2350.

    The renunciation fee and expatriation tax are explicit violations of Article 15 the United Nations Universal Declaration of Human Rights, to which the U.S. was a founding signatory.

    If you have to pay to leave, you’re not a citizen; you’re property.

    Ok, but I don’t have to support any of this to maintain that I’m not bothered by the desire to renounce citizenship, which is the point I was responding to.

    • #33
  4. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    Ed G.: No, I’m expecting that as citizens we share the responsibilities of citizenship. The amount and method of satisfying that responsibility is up for debate, but the responsibility exists no matter where one lives.

    From each according to his ability…

    • #34
  5. Ed G. Member
    Ed G.
    @EdG

    Jamie Lockett:

    Ed G.: No, I’m expecting that as citizens we share the responsibilities of citizenship. The amount and method of satisfying that responsibility is up for debate, but the responsibility exists no matter where one lives.

    From each according to his ability…

    That’s not at all what I said.

    Do citizens have a responsibility to pay taxes or not? Or is it that you think different citizens should pay differently?

    • #35
  6. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    Ed G.: That’s not at all what I said. Do citizens have a responsibility to pay taxes or not? Or is it that you think different citizens should pay differently?

    I think residents have an obligation to pay because they are recipients of the benefits of taxation. Citizens abroad are not the recipients of those benefits and thus should not have to pay taxes.

    A good example is Social Security – income earned abroad does not go into the calculations for social security payments, but you still get taxed to pay for it (I am dismissing the ridiculous illusion that payroll taxes are funding Social Security).

    • #36
  7. Big Green Inactive
    Big Green
    @BigGreen

    Jamie Lockett:

    Man With the Axe: 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.

    It can be very complicated depending on jurisdiction, type of income, etc. but, in general, companies do not face double taxation on foreign income.  They receive a credit for taxes paid to the foreign jurisdiction (this calculation itself can be quite complex) and then owe incremental tax to the US government upon repatriation, the amount of which is the tax owed at a 35% tax rate on that foreign income less the actual tax paid to said foreign jurisdiction.  This is an oversimplification (there are exclusions, an AMT rate, etc.) but you get the drift.

    • #37
  8. Big Green Inactive
    Big Green
    @BigGreen

    Man With the Axe: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.

    Not quite following this.  If a US company earns income in a foreign jurisdiction that does not tax corporate income, that company “should” pay tax in the US?  Why?

    • #38
  9. Miffed White Male Member
    Miffed White Male
    @MiffedWhiteMale

    Ed G.:

    Jamie Lockett:

    Ed G.: No, I’m expecting that as citizens we share the responsibilities of citizenship. The amount and method of satisfying that responsibility is up for debate, but the responsibility exists no matter where one lives.

    From each according to his ability…

    That’s not at all what I said.

    Do citizens have a responsibility to pay taxes or not? Or is it that you think different citizens should pay differently?

    Puerto Rico could not be reached for comment.

    • #39
  10. Man With the Axe Inactive
    Man With the Axe
    @ManWiththeAxe

    Big Green: Not quite following this.  If a US company earns income in a foreign jurisdiction that does not tax corporate income, that company “should” pay tax in the US?  Why?

    I’m not saying they should pay US taxes, rather that it doesn’t bother me much if they do, since it’s not double taxation.

    I would make the analogy of a commuter who lives in New Jersey and works in Pennsylvania. If he pays income tax in Pennsylvania it’s unfair to make him pay again in New Jersey. But if he doesn’t have to pay the former I’m okay with him paying the latter.

    I should add that I don’t think corporations should pay any taxes.

    • #40
  11. Ed G. Member
    Ed G.
    @EdG

    Miffed White Male:

    Ed G.:

    Jamie Lockett:

    Ed G.: No, I’m expecting that as citizens we share the responsibilities of citizenship. The amount and method of satisfying that responsibility is up for debate, but the responsibility exists no matter where one lives.

    From each according to his ability…

    That’s not at all what I said.

    Do citizens have a responsibility to pay taxes or not? Or is it that you think different citizens should pay differently?

    Puerto Rico could not be reached for comment.

    That the principle isn’t applied consistently is not a refutation of the principle.

    • #41
  12. nom de plume Inactive
    nom de plume
    @nomdeplume

    Trump’s tax plan in a word:  MOOT.

    It does not matter one iota.  Might be a good plan.  Might be a bad plan.  Either way, the problem is, it is not real.  Coming from Trump, the “Game Player,” it’s smoke and mirrors.

    • #42
  13. Ed G. Member
    Ed G.
    @EdG

    nom de plume:Trump’s tax plan in a word: MOOT.

    It does not matter one iota. Might be a good plan. Might be a bad plan. Either way, the problem is, it is not real. Coming from Trump, the “Game Player,” it’s smoke and mirrors.

    Although I’d also say that of any plan to come from any campaign. None of it is real; none of it will ever see the light of day as a duly enacted law; all of it will be tempered and compromised by opposing views and by new and more complete information.

    Broad vision and principles are more important. I really can’t speak to Trump’s sincerity on any of this – that’s the problem with Trump’s mode of being (or one of the problems).

    • #43
  14. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    Ed G.: Although I’d also say that of any plan to come from any campaign. None of it is real; none of it will ever see the light of day as a duly enacted law; all of it will be tempered and compromised by opposing views and by new and more complete information. Broad vision and principles are more important. I really can’t speak to Trump’s sincerity on any of this – that’s the problem with Trump’s mode of being (or one of the problems).

    And this is where I find Trump’s broad vision on taxes to be dangerous – it is not a good, let alone conservative, policy goal to remove even more people from the tax rolls.

    • #44
  15. Man With the Axe Inactive
    Man With the Axe
    @ManWiththeAxe

    Man With the Axe: 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.

    One more point:  A person with a zero tax rate cannot be incentivized with the promise of tax cuts.

    • #45
  16. John Penfold Member
    John Penfold
    @IWalton

    check out Epstein on the Libertarian Sept 23.  Very interesting discussion of taxes, especially an approach to a consumption tax I’ve never heard before.  By George I think he’s got it.

    • #46
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