Tax Fog

by on September 28, 2017 in Economics, Politics, Uncategorized

Whenever we are told about a Trump plan we have to use the word “plan” very carefully. Thus far Trump’s various plans have been more vague suggestions, hints, clues to what’s inside his head, or varieties of “what a plan were to look like were Trump to have an actual plan, but he doesn’t”.

This week’s ballyhooed tax plan is no exception.

It has been introduced as a framework. A skeleton. A coat hanger upon which Congress will need to hang actual policy in order to legislate. It isn’t a plan, that’s for sure.

So what is it?

Much like Trump’s other initiatives — I use the word lightly — the tax plan is a series of items that now need to be stitched together. In other words the really hard part lies ahead. More importantly it lies ahead in waters teeming with lobbyist sharks waiting to pounce and defend privileges that sundry clients want preserved.

The American tax code needs thorough overhaul. It is riddled with special interest privileges, it is incomprehensible, bloated, and really bad at the one thing it needs to do which is to raise taxes to fund government activity. Let’s not forget why the tax code exists: the government needs cash. And that cash comes from you and me.

Now I don’t want to get into discussions about the interesting idea that the government can fund itself simply by printing money. That’s for another day. Let’s stay focused on the here and now by looking at the latest Trump tax “plan”.

First: it looks more like a tax cut that a thorough tax reform. More to the point it is a tax cut for the wealthy. What a shock. Trump wants the current seven tax rates to be collapsed into three. Guess what? the biggest change comes at the top where the current top rate would drop from 39.6% to 35%. At the other end of the scale the lowest rate would rise from 10% to 12%. The optics of this are hard to sell as a tax cut for the poor: the lowest rate is actually going up, while the highest rate is going down. Initial guesses by tax experts suggest that about 80% of all the tax cuts in the plan will benefit the rich. Some lower income families might even see their taxes rise.

Second: Trump moves on by changing the way in which people can deduct various items from their gross income to arrive at their taxable income. The current code is riven through with dodges and wheezes that allow higher income people to lower their taxable income aggressively, whereas it offers much less to lower income people. Trump says he wants simplify the code and the morass of deductions would be good place to start. Why not get rid of them all? But, no, Trump gets stuck in the middle.

His simplification appears to reduce to doubling the standard deduction which all families can claim. Unfortunately he also gets rid of the personal deduction. So a family of four would get the new deduction of $24,000, but lose their current standard deduction of $12,700 and the four individual deductions of $4,050 they can currently claim. Do the math: that is a reduction from $28,900 to $24,000. There are plenty of middle class families who will be hurt, not helped, by this little piece Trump inspired simplification. Meanwhile another old limitation on the way in which rich people can limit their taxes — the so-called Alternative Minimum Tax [AMT] will be eliminated. AMT cost Trump $31 million in the one and only year we know about his taxes. But, he assures us, he won’t benefit personally at all from his plan. Really?

Perhaps most notable in this decluttering of deductions is the elimination of the deduction people can claim on the Federal tax forms for any State and Local taxes they pay. It has long been a goal of Republicans to eliminate this deduction because the people who benefit most from it live in the higher tax/higher service states that typically vote for Democrats. Taxes may well go up for some upper middle income families in the blue states.

Other favorite deductions, such as that for interest on mortgages, are staying put in the Trump plan. So at least he won’t have to hear cries from the real estate lobby.

Third: the corporate tax is targeted for major changes. The notional rate is reduced: Trump wants it down to 20%, whether it gets there is another matter. And many of the current deductions corporations use to limit their taxes are done away with. One that caught my eye is the deduction for interest on debt. Were this to be part of the final legislation it would dramatically reduce corporate appetite for debt-based investment.

Fourth: we get to a sticky one. Trump wants to reduce change the tax rate charged to people who use what is known as the “pass-through” business structure. In brief this structure allows a taxpayer to pass corporate income through and pay tax at the personal level. It is usually a technique for small businesses. The idea being that income is taxed only once: if income of a business is taxed within the business and then dividends paid to business owners are then taxed again as their personal income this is equivalent to double taxation on the same income. In the context of small business this has long been regarded as unfair.  However, some of the richest people in the country have set themselves up as pass-through businesses too. They would get a windfall were the tax rate on pass-throughs be reduced significantly below the various tax rates applied to straightforward income. And guess what? Trump’s businesses are pass-through corporations. He would benefit from such a windfall. Surprise.

Fifth: Trump finally fulfills another long term goal of the Republicans: he wants to eliminate the estate tax. Taxes on inheritances have irked the GOP for decades. They have managed to whip up a public fury over what they demean as a “death tax”. Getting rid of it is a key promise to their loyal voters. Not that it has any impact on the vast majority of people: the level at which estate tax kicks in reduces its impact only to the wealthy. This aspect of the plan will inevitably exacerbate inequality and entrench the plutocratic class even more than ever.

Sixth: there seems to be no doubt that the Trump plan would vastly increase the deficit. There is no word on what, if anything, Trump proposes doing about that. Business taxes would be reduced sharply which will benefit upper income households who hold a disproportionate amount of corporate shares, and thus far no one has offered any countervailing budget cuts and/or alternative tax increases.

All those deficit hawks who shrilled about Obama and his deficits have, up until now, been remarkably quiet with respect to Trump’s proposed budget busting. Presumably we are back to the old days of Dick Cheney pronouncing that depicts don’t matter.

Oh: one old saw is back.

Many Republicans are rallying behind the idea that all these tax cuts for business and the rich will induce enormous amounts of growth which will, so the story goes, raise income sufficiently that the extra tax on that extra income will offset the deficit created by the tax cuts.

We’ve heard that one before. It didn’t work then. It won’t work now. But the Republicans need a legislative win else they will face the wrath of their more fanatical supporters. So they are now keen to throw the Federal budget to the wolves.

So, in summary:

Trump’s tax plan isn’t really a plan. It is a set of suggestions. It isn’t a reform. It is a tax cut. It doesn’t leave the wealthy untouched. It will benefit the wealthy enormously. It won’t stimulate the economy and/or job creation. It will inflate the deficit and that’s about it.

No it’s not a plan. It’s mainly fog.

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