Trump's tax plans

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Not adding up.

Trump misleadingly claims that U.S. firms face the highest taxes in the world, and therefore his plan slashes the corporate income tax rate from 35 to 15 percent. Since capital income is heavily concentrated at the very top of the income distribution, and the corporate income tax largely falls on the owners of capital, this is a steeply regressive tax cut.

But Trump would go one step further, creating an enormous tax loophole for the rich by applying his 15 percent corporate rate to “pass-through” entities as well. Pass-through entities are businesses whose income are not taxed at the corporate level, but rather passed through entirely to the businesses’ owners and then taxed at the owners’ individual income-tax levels. High-income households can easily avoid paying their full income tax bill by reclassifying their income as pass-through income. This loophole allows Trump to claim that he is closing the carried interest loophole, while actually lowering the rate that hedge fund managers would pay from 23.8 percent to 15 percent.

Trump’s plan for the economy does little to help working people | Economic Policy Institute

Now we know why he has so many finance and hedge fund people as economic advisers..

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The whole article is worth a read:

What the GOP candidate outlined in his big economic speech in Detroit on Monday relies entirely on an outdated theory (trickle-down economics), a debunked concept (that free trade is bad) and out-and-out legerdemain that attempts to dress up tax cuts for the rich as a boon to the middle class. It was an exercise in magical thinking that exposed almost all Trump’s promises on the stump over the past year as baseless. And it took place in a city of Detroit that exists only in Trump’s imagination.

Trump’s Year of Magical Economic Thinking - POLITICO Magazine

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Jeffrey Frankel, an economist of considerable standing, on Trump's tax proposals:

Trump’s Fiscal Brainstorm: Cut Taxes for the Rich

This year’s US presidential election campaign differs radically from past patterns, including in the departure of the Republican nominee from many of the policy positions traditionally taken by his party.  Examples are his lack of support for international trade, military alliances, or the institution of marriage.   But when Donald Trump released some positions on tax policy recently, the differences with Hillary Clinton’s proposals fell very much along usual party lines.  His is the kind of tax policy that has long been favored by Republican presidential candidates and congressmen:  tax cuts that overwhelmingly benefit the rich and that are not accompanied with any plans to pay for them.

Should we pay attention to campaign platforms?

Of course there are reasons for hesitating to judge presidential candidates by their platforms.  Plans announced in the campaign are often a poor guide to what the president will actually do once in office.  Candidate George W. Bush, for example, promised in 2000 to renounce nation-building adventures abroad, to maintain fiscal responsibility, and to treat greenhouses gases as pollutants under the Clean Air Act.  Needless to say, his administration rocketed off 180 degrees in the opposite direction on these issues.

Mr. Trump, in particular, changes his positions with head-spinning frequency, denying that he said things that he is on record as having said a short time before.   A common tactic is to accuse the media of making up the earlier statements, even when the earlier statements are on tape.  Another tactic is to say that he was only being sarcastic.

Are we supposed to take seriously, for example, his statements during the primary debates that American workers’ wages are too high?   Or that he could and would happily contemplate negotiating the terms of the national debt with creditors, otherwise known as defaulting?   Are we supposed to overlook such reckless statements, and ascribe them to an earlier period when he was “young and irresponsible”?

Compare the zig-zags that Trump has pulled off with the minor shifts that have been sufficient in the past to get other politicians tarred with “flip-flopping”.  Remember, for example, the reaction when John Kerry in 2004 said “I actually did vote for the $87 billion before I voted against it.”   (The earlier Democratic measure that he supported would have paid for the $87 billion in Iraq war funding by reducing Bush’s tax cuts, whereas  the version that he voted against instead irresponsibly added the cost to the national debt.)

In any case, we policy wonks are obliged to try to evaluate the policy plans that the candidates offer.  The alternative is to leave the national discussion focused entirely on the current week’s poll results, reporting unedifyingly whether the candidates are rising or falling among voters classified by various combinations of gender, ethnicity, and socioeconomic status.

How the parties differ

Some positions that a candidate may truly hold don’t deserve the attention they receive because in practice he or she stands little or no chance of being able to bring them about if elected. An obvious case is when their proposals are blocked by the other party if it has a majority in congress.  Another case is international constraints.  Although there is a lot of attention to trade agreements this year, promises by presidential candidates to negotiate a new improved trade agreement are seldom if ever implementable once they get to office.  (The truth is, in international negotiations such as TPP, the US has already gotten about the best deal it can get, one that is much better than most people realize.)

The difference between the two parties lies not in some fantasized ability to reverse the rise in inequality by turning the clock back 50 years on trade, or even on somehow reversing the long-term shift from manufacturing to services.  Rather the difference lies in some very practical live policy issues, particularly some that would reverse the trend that leaves many workers behind.  Examples include universal health care (extending the ACA, i.e., Obamacare, rather than abolishing it), infrastructure spending ($275 billion cumulative, in Secretary Clinton’s campaign proposal), compensation for those who lose jobs due to trade (or other forces beyond their control), and a more progressive tax structure (including expansion of the Earned Income Tax Credit).

Trump’s tax plan

Trump made his most serious attempt at a fiscal plan on August 8.   The tax proposal has four salient features, fairly described as tax cuts for the rich.  There is no indication how the tax cuts will be paid for and every indication that they will sharply expand the budget deficit, as happened when Reagan and Bush enacted record budget-busting policies.   All of this is very much in line with proposals from Republican politicians over the last four decades, all the while attacking Democrats for running deficits.

• Trump proposes to abolish the estate tax entirely. Bush and congressional Republicans tried hard to do this, and got close, but didn’t quite make it. Trump, like his predecessors, tries to hide the fact that only the very rich would benefit because the current estate exemptions are so high: $10.9 million for the estate of a married couple (and half that for an individual). In the most recent year available, only 4,700 estates in the entire country, out of 6 million deaths, required the reporting of some estate tax liability. Trump repeated the old fairy tale of farms or small businesses that have to be sold by heirs to pay the estate tax; but Republicans after all these years are still unable to come up with specific instances of this actually happening.
  
• He proposes to cut corporate income taxes very sharply, to 15%. It is true that the US corporate income tax rate is among the highest in the world, at 35%, and that this probably contributes to companies keeping profits overseas, rather than repatriating them to the US. But as most tax policy experts will tell you, a reduction in the overall rate should be accompanied by base-broadening. In particular, we should abolish corporate tax deductions such as those designed to encourage corporate debt and oil drilling. We could thereby reduce harmful distortions in the economy while simultaneously making up revenue.
  
• Trump’s proposals to cut personal income taxes have now changed a bit. Before the primaries, his fiscal proposals included cutting the top marginal income tax rate from 39.6 %, the current level, to 25%. Independent analysts pointed out that his tax policies would lose about $10 trillion in revenue over the first decade, a mind-bogglingly big number.  They would rapidly drive to record levels the national debt as a share of GDP, which has been coming down over the last five years.  His most recent proposal is to cut the marginal tax rate for high earners by about half as much, to 33%.
  
• A new proposal, apparently added at the urging of daughter Ivanka Trump: Allow tax deductions for the entirety of average child care costs. Any such deductions benefit only those in high enough tax brackets to itemize deductions (like mortgage interest), which is mostly those who earn more than $75,000. That is well above US median household income of $54,462 in 2015.
  

The Democrats would love to be able to accuse Trump of designing his tax cuts so as directly to benefit him, his family, and people like them.   It is harder to make this accusation because the candidate still refuses to release his own income tax records (unlike all previous candidates since Richard Nixon).  There is no shortage of guesses as to what it is that Trump must be trying to hide.  One good guess is that in some years he has paid no taxes at all, by taking advantage of loopholes already available to big real estate developers.  If so, his annual tax bill can’t be cut further.  But he would still gain from the elimination of the estate tax.

How to pretend that tax cuts = fiscal discipline

Basic arithmetic says “government outlays minus tax receipts equals the budget deficit.”  Republican presidential candidates have seemingly had trouble understanding this equation since 1980.  They propose large specific tax cuts without specific spending cuts, and yet claim they are going to reduce the deficit.  The outcome was the record increases in budget deficits during the terms of Ronald Reagan and George W. Bush.

Trump’s tax cut proposals follow in this tradition of fiscal irresponsibility. The budget plans are still too vague — particularly with respect to discretionary government spending, social security and Medicare – to allow an informed estimate of their impact on the federal deficit and national debt.  But the candidate may be subjected to pressure to become more specific as the date of the election draws near.

Trump may look to his predecessors’ strategies for guidance.  It is worth recalling the four magic tricks that politicians calling themselves fiscal conservatives have been using for 35 years, evasions to facilitate making fiscal promises with a straight face.  These tricks are often deployed in sequence, one succeeding another as they fail to work.

(1) The “Magic Asterisk.”   The candidate promises to balance the budget at the same time as cutting taxes by spending cuts that are not specified but supposedly will be in the future (“future savings to be identified”).

(2) “Rosy Scenario.”  One can forecast an increase in tax receipts if one forecasts an increase in the national rate of growth of income.  One PhD economist has finally signed on as an adviser to the Trump campaign (though he has apparently yet to talk to the candidate); he has suggested that under a Trump presidency the American GDP growth rate will magically double.  This is the same tactic adopted by Jeb Bush during the primaries, and many other politicians before.

(3) The Laffer hypothesis.  But why should growth double?   Reagan, Bush, McCain, and other candidates signed on to the proposition that their proposed cuts in tax rates will spur economic activity so much that total tax revenue (the tax rate times the economic base) will go up rather than down.   Although this “Laffer proposition” has been disproved many times, and the economic advisers to those three candidates clearly disavowed it, the temptation to square the budgetary circle by making this claim is too strong to resist.  Watch for Trump to come out with it.

(4) The “Starve the Beast” hypothesis.  Finally, after the other justifications for big tax cuts turned out wrong, Presidents Reagan and Bush fell back on the theory that, even though tax revenue had in fact fallen rather than rising, this was a good thing after all: it would politically force congress to approve spending cuts.  But these are cuts that the president himself never gets around to proposing.

Perhaps it is inevitable that candidates at the platform-making stage wish away such real-world constraints as congressional politics or international realities, leaving voters disappointed after taking office by failed “promises”.  But politicians shouldn’t be able to wish away the constraints of arithmetic — not when the promises reflect the same failed sleight of hand that has been tried and exposed so many times before.

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The Trump revised tax plan gets some analytical help from the Tax Foundation, which simply exists to give supply-side tax cuts for the wealthy an air of intellectual respectability. The assumption is that tax cuts create large increases in business investments, which grows the economy. This isn't very likely in today's economy:

• Capacity utilization is at 75%
  
• Companies enjoy record profitability and record cash balances, do not lack funds to invest
  
• Interest rates are at record lows
  

So it's not lack of funds that's the problem with investments and the tax cuts are highly regressive, favoring the wealth disproportionally, which shifts income from low to high savers, something which could very well slow, not accelerate economic growth.

The revised tax plan that Republican presidential nominee Donald Trump will release today was reportedly designed at least in part to reduce the cost of his earlier plan,[1] which would have generated very large revenue losses.[2]  The revised plan now looks similar to the tax plan that House Republican leaders introduced in June, which cost less than Trump’s original plan. 

Moreover, like the House plan, the Trump plan takes advantage of an aggressive approach to “dynamic scoring” that the Tax Foundation uses to estimate how tax cuts affect the economy and the budget, which sharply lowers the estimated revenue loss from certain tax-cut provisions. [3]  We should, however, view such large dynamic effects derived from Tax Foundation estimates with considerable skepticism.  That’s because the Tax Foundation, with its unusually large dynamic estimates, is considerably outside the analytic mainstream.

In another example, the Tax Foundation estimated that repealing the estate tax would increase national saving and investment so much that it would generate enough new revenue to pay for over 90 percent of its costs.  But CBO has estimated that raising estate taxes — the opposite policy course — would increase national saving available for investment.  And earlier this year, the Tax Foundation estimated that cutting the corporate tax rate by 20 percentage points would generate enough new revenue to pay for 54 percent of the cost, while JCT estimates that corporate rate cuts would have dramatically smaller dynamic revenue impacts.

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In a 2015 piece for The New York Times’ “The Upshot,” Josh Barro reported that in discussions of the Tax Foundation model “with 10 public finance economists ranging across the ideological spectrum, all … said its estimates of the economic effects of tax cuts were too aggressive. ”a  Here are some key excerpts from the Barro article.

The optimistic results come mostly from assumptions about business investment being wildly responsive to tax policy. . . .
This assumption led various economists to invoke the names of small islands.
“That’s true for the Netherlands Antilles, it’s not true for us,” said Doug Holtz-Eakin, the former head of the Congressional Budget Office who was John McCain’s top economic adviser during his 2008 campaign.

“It’s a model that might be appropriate for Bermuda,” [Boston University professor Laurence] Kotlikoff said.
In a very small, very open economy, the Tax Foundation might be right:  Cuts in investment taxes would drive a flood of foreign capital, producing a huge percentage increase in investment.  But the United States is simply too big for that to work.  The U.S. economy also is not perfectly open; for example, we have some restrictions on trade.  Therefore, estimates of the amount of investment created by investment tax cuts should be more modest.  Economists also criticized the Tax Foundation model for assuming all that new investment would fall into place very rapidly, and for failing to address economic effects from spending cuts or increased borrowing that the tax cuts would require in their first years.

Trump Campaign’s “Dynamic Scoring” of Revised Tax Plan Should Be Taken With More Than a Grain of Salt | Center on Budget and Policy Priorities

The positive effects from cutting the estate tax are especially suspect. This is a tax that only matters for estates over $5M (or $10M for couples).

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The plan would treat carried interest as regular income, eliminating a loophole that allowed wealthy investment managers to pay an artificially low income tax rate.

However, it appears to leave in place an even bigger loophole by treating pass-through income from a corporation as business income. This would enable business owners to shelter massive amounts of income from taxation. Trump also pledged a major decrease in regulation of business activity including, oddly, a promise to eliminate food safety requirements that cover “farm and food production hygiene, food packaging, food temperatures.”

Trump Has a New Economic Plan, but the Numbers Still Don’t Add Up | The Fiscal Times

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Trump's revised tax proposals. No surprises here. No 25M jobs, despite hefty 'dynamic scoring', not even close. Most tax cut benefits still go to the rich and the middle class actually fares worse under the new proposals. Still very expensive..

Later he said of the new plan that the wealthy would end up paying more, while under his new plan, “Everybody’s getting a tax cut, especially the middle class.” But the new plan is out, as is a new analysis from the Tax Foundation. And it does not find this to be the case.

There is some confusion about how Trump’s plan would treat income individuals make from pass-through businesses, which pay tax through the individual tax code by immediately showing up on the owners’ own tax bills and not through the corporate rate. Think an LLC, not Google or McDonald’s. The campaign hasn’t adequately specified whether this income will be subject to the top rate on income — 33 percent— or the lower corporate tax rate of 15 percent.

Many pass-through businesses are quite small, while others are larger, like law and real estate firms. Trump’s own business, the Trump Organization, is an LLC, so allowing all income from it to be taxed at the lower 15 percent rate would give him an enormous break.

But either way, one thing is clear: the middle class will get less than Trump had originally planned, while the rich will get more. Those in the middle three-fifths of the income scale would have seen their incomes boosted by 2.2 percent, 6 percent, and 7.3 percent under his original proposal; those increases have been sharply reduced to 0.8, 1.3, and 1.9 percent.

Meanwhile, depending on how passthrough income is handled, the richest Americans also see their tax cut pared back, but not by nearly as much. Originally, the top 10 percent would have seen a 13.6 percent increase in its come and the top 1 percent would have gotten a whopping 20.7 percent. Those have been cut back to either 5.4 or 8.3 percent and 10.2 or 16 percent, respectively, depending on the details.


CREDIT: Tax Foundation

The rich, therefore, still get the majority of the benefit from Trump’s tax plan.
The Tax Foundation has more bad news for Trump. Last week as he unveiled his plans, he claimed they would create as many as 25 million jobs within ten years. But the analysis found that his tax plan would only create somewhere between 1.8 million and 2.2 million jobs over a decade, which would mean the rest of the more than 20 million jobs would have to somehow be a result of his trade, immigration, and energy plans.

The Tax Foundation also relies on a questionable method to get to these numbers, deploying the dynamic scoring model that bakes in assumptions about how tax cuts will affect future economic growth. Those assumptions are almost always impossible to make with certainty, and they also assume tax cuts lead to big growth, which is rarely the case.

Trump’s tax package also remains costly. Originally the Tax Foundation had found that his first plan would cost $10 trillion over a decade; while the new one has a much lower price tag, it’s still $4.4 trillion or $5.9 trillion on a static basis, depending on the treatment of passthrough income, or $2.6 trillion to $3.9 trillion with dynamic scoring..

Trump’s new tax plan screws the middle class

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Stiglitz explaining what's wrong with Trumponomics in a little video:

Nobel Prize-winning economist and "The Euro" author Joseph Stiglitz explains how Donald Trump is wrong about the economy.

Joseph Stiglitz on Trump is wrong about the economy - Business Insider

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The Tax Foundation reckons that Trump's plan to slash personal and corporate taxes would reduce federal revenue by between $4.4 trillion and $5.9 trillion over a decade, not assuming any possible pro-growth economic feedback. But even when optimistically factoring in better incentives to work and invest — what tax wonks call "dynamic scoring" — the plan would still lose between $2.6 trillion and $3.9 trillion over the next decade. That means that even assuming gangbusters growth, Trump would greatly worsen the nation's debt situation. What's more, none of this added Trump debt accounts for the massive new spending Trump has promised on the military and infrastructure. 

In a new analysis, Peterson looks at what might happen if the Trump administration imposed a big tariff on imports from China and Mexico, with those nations responding in kind. The projected result would be recession and the loss of nearly 5 million jobs at the downturn's nadir in 2019. And depending on how exactly the conflict played out and how global supply chains were affected, American consumers — at least those who still had jobs — might find it tough to buy their favorite electronic gadgets.

Donald Trump's economic plan is a complete and utter joke

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One thing that is already painfully clear, though, is that there are two vastly different sets of rules governing Americans’ economic lives – one for poor and working people, and another for Trump and the rest of the rich and famous. The odds of him rewriting those rules are about as great as the amount of money he shelled over to the IRS in 1995.

Donald Trump is a 1%er. Paying taxes is optional to people like him | Kate Aronoff | Opinion | The Guardian

Donald Trump and Hillary Clinton are dramatically different presidential candidates—and that extends to their tax plans. New analysis by the nonpartisan Tax Policy Center shows that Trump’s tax plan would cut taxes for most workers, with the richest benefiting the most. The top 1% of earners would enjoy an average tax cut of $214,690 per year. The top one-tenth of 1% would save $1.066 million. Hillary Clinton’s tax plan would have the opposite effect on wealthy taxpayers. The top 1% would pay an extra $117,760 per year, with the tax bill for the top 0.1% rising $805,250. Trump’s tax cuts would swell the national debt by $7.2 trillion. Clinton’s tax hikes would cut it by $1.4 trillion. Here’s how the plans compare on a few basic measures:

1 percenters would save $215,000 per year under Trump’s tax plan

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Bond king Bill Gross isn't too impressed:

Gross said the proposals so far from the transition team had shown nothing to benefit the working-class Americans who helped propel Trump to his unexpected victory. "But while the Fox promised jobs and to make America great again, his policies of greater defense and infrastructure spending combined with lower corporate taxes to invigorate the private sector continue to favor capital versus labor, markets versus wages, and is a continuation of the status quo," the letter said.

Gross said such policies, like a lower corporate tax rate, were misguided given that the effective tax rates on average for S&P 500 companies were well below the statutory rate of 35% anyway. He also said the idea of a tax holiday to bring cash back in from overseas would not have the effect that Trump has promised. "The last time such a 'pardon' was put into law in 2004, no noticeable pickup in investment took place," Gross wrote. "Of the $362 billion that earned a 'tax holiday', most went to dividends, corporate bonuses, and stock buybacks."

"Both the Clinton Democrats and almost all Republicans represent the corporate status quo that favors markets versus wages; Wall Street versus Main Street," the letter said. "That's why the American public and indeed global citizens will continually take a wrong turn in their efforts to neuter the establishment and to regain several decades' lost momentum in real wages versus real profits."

Gross, for his part, believes a government-led program to employ Americans such as John F. Kennedy's AmeriCorps or Franklin D. Roosevelt's New Deal employment programs would be a better method of solving Americans ills.

Bill Gross: Donald Trump election US economic 'damaging' - Business Insider