Trump's Tax Plan Not Grounded In Reality
There is much to like about his plan, but also much to oppose.
Donald Trump, the brash, politically incorrect, self-promoting billionaire businessman turned politician has, in defiance of all political wisdom, rocketed to the top of the polls by tapping into the frustration and anger of the conservative base, which feels betrayed by GOP leadership’s absolute refusal to fight Barack Obama’s lawless actions.
However, he has increasingly received criticism for his bumper-sticker sloganeering brand of campaigning, which has been long on chest-thumping but short on specifics. In response, Trump released recently his income tax reform plan.
From a broad-strokes perspective, there is much to like about Trump’s plan; the elimination of the marriage penalty and the Alternative Minimum Tax, the elimination of loopholes and deductions, the elimination of the death tax, a reduction in the number of tax brackets and a lowering of the rates (four brackets of 0%, 10%, 20% and 25%), and a steep reduction in the corporate income tax rate to 15% (a great way to encourage investment in U.S. companies, which now bear the burden of the highest corporate tax rate in the world).
Trump’s plan would also require American multi-nationals to repatriate their offshore capital, encouraged by a 10% repatriation tax rate.
However, as with everything in life, the devil is in the details.
Writing an op-ed in The Wall Street Journal, Trump states his plan will provide tax relief for the low- and middle-income workers, relieving single people with incomes below $25,000, and those married or filing jointly earning below $50,000, of any income tax liability. This, Trump notes, will remove 75 million households from the income tax rolls. Of these tens of millions of Americans, Trumps says, “They get a new one page [tax] form to send the IRS saying, ‘I win.’”
The problem with those newly exempted taxpayers being able to say “I win” is that if there is a winner there must be a loser, and the losers will be the increasingly shrinking pool of Americans who are paying the bulk of the income taxes. As it is, 36% of all filers in 2013 didn’t pay taxes. By expanding the number of Americans who pay no income taxes to roughly 50%, Trump would shift the burden even more heavily to those who are paying income taxes, further establishing a bifurcated society of a majority living off the labor of the minority.
Trump may think this is a great idea, and self-avowed socialist Bernie Sanders, running for the Democrat nomination, would likely love that part of the plan as well. You know who else would love it? Karl Marx. In The Communist Manifesto, Marx lays out 10 “planks” of communism, one of which is a “heavy progressive or graduated income tax.” Does that not describe our current income tax system, which would be made even more progressive under Trump’s “reforms”?
Furthermore, when we have had annual deficits between $400 billion and $1.5 trillion over the last decade, in large part due to the rapidly expanding expenditures for welfare programs (now clocking in at more than $1 trillion per year) and accelerating growth in every department of government, do we really want to give more than half of all Americans no reason to be concerned about such government growth? By eliminating their income tax burden completely, they get all of the benefits of government programs with none of the cost, and therefore no reason to control those costs.
From a practical standpoint, in the short term this plan will certainly stimulate economic activity. In the long term it will cause even more damage to America’s financial health, because Trump’s plan would drastically expand the federal budget deficit. Though Trump claims his plan would not add to our deficits or the national debt (isn’t that what Obama told us about ObamaCare?), that claim relies on a lot of wishful thinking not grounded in historical reality; namely, on achieving a sustained growth rate of 6% or more, which is highly unlikely, as well as the elimination of waste, fraud and abuse.
We’ve heard for decades politicians promising to eliminate waste, fraud and abuse, and not only have we not seen these things eliminated, we’ve seen them get worse, because the entrenched constituencies receiving the largesse from this waste, fraud and abuse don’t like their goodies messed with. These are the same constituencies that reward politicians with votes and campaign donations.
However, the most glaring, gaping hole in Trump’s plan is his refusal to touch entitlements. Trump has stated, “Every Republican wants to do a big number on Social Security, they want to do it on Medicare, they want to do it on Medicaid. And we can’t do that. And it’s not fair to the people that have been paying in for years and now all of the sudden they want to be cut.”
These entitlement programs now constitute the vast majority of all federal spending, and the cost of these programs is growing exponentially, with projected unfunded liabilities in the tens of trillions of dollars over the coming decades. A refusal to touch these programs renders all other positives of his plan moot.
A plan that takes more than half of all Americans completely off the income tax rolls, places the burden of the cost of government more heavily on an increasingly shrinking number of taxpayers, adds to the deficit, relies on unrealistic growth numbers to (only partially) offset the tax cuts, and doesn’t address the skyrocketing cost of servicing interest on the national debt, is simply not a plan that is grounded in reality.
Trump has risen in the polls by speaking his mind bluntly. Yet before we hand the reins of power over to another charismatic narcissist, we had better make sure that we examine the rhetoric in fine detail, and make sure it is grounded in reality. This plan is not.