According to news accounts, the tax plan that the Trump Administration will release on Wednesday won’t be a comprehensive proposal but, rather, a statement of general principles—a glorified wish list. It’s well known in Washington that the staffers working for Steven Mnuchin, the Treasury Secretary, and Gary Cohn, the director of the National Economic Council, are a good ways away from drafting a detailed proposal, and that the only reason the Administration is making an announcement this week is that the President demanded one in advance of Saturday, which marks his hundredth day in office.
It’s tempting to dismiss the whole thing as a publicity stunt, but that would be a mistake. Although the nuts and bolts of Trump’s tax plan remain unclear or unformed, leaks and public statements from Administration officials this week have confirmed three key things about what he intends to do:
1. Trump will propose a cut in the corporate-income-tax rate, from thirty-five per cent to fifteen per cent, and this will be combined with a mechanism to allow big corporations to repatriate taxable earnings currently being held abroad to pay an even lower rate.
2. The Administration appears determined to overhaul the personal tax code, cutting the top rate and reducing the number of tax brackets—despite recent arguments made against such measures from economists who advised Trump during the campaign.
3. There is a huge hole on the revenue side. Trump’s advisers have reportedly rejected House Speaker Paul Ryan’s proposal for a big new tax on imports, and they haven’t yet settled on which, if any, of the loopholes in the tax code they will close. In the absence of any direct revenue enhancers, Trump’s advisers are relying on faster economic growth to boost tax receipts and prevent the budget deficit from ballooning. On Monday, Treasury Secretary Mnuchin said the tax-cutting plan would “pay for itself.”
In assessing the Administration’s approach, the question to ask is: Will these measures help alleviate the most pressing economic problems facing the country, such as sharply rising inequality and the stagnant growth in wages and productivity? The short answer is no. In all likelihood, wages and productivity would be largely unaffected by Trump’s tax cuts. And, since the giveaways would be concentrated on the very rich, measures of post-tax inequality would rise.
Trump’s supporters and some conservative economists would disagree with these conclusions, of course. Their argument is familiar: that cutting taxes, particularly corporate taxes, would unleash a wave of investment, innovation, and growth, in turn boosting wages. But the supporting evidence is weak. In the past ten years, Britain has cut its corporate tax rate from thirty per cent to nineteen per cent. The share of gross fixed-capital formation in G.D.P. is still much lower than it was in the nineteen-seventies, when the tax rate on corporations was more than fifty per cent. And wage growth was a lot stronger back then, too.
Because of all the loopholes in the U.S. tax code, the effective corporate tax rate is already a lot lower than the official rate of thirty-five per cent. In a 2014 study, the Congressional Research Service estimated that the average rate paid by large corporations was 21.7 per cent. A study by the group Citizens for Tax Justice found that the effective rate was 19.4 per cent. Although levelling the playing field at fifteen per cent would boost after-tax corporate profits somewhat, it’s hard to see that translating into big gains in capital investment and wages. Even Ben Bernanke, the former Fed chairman—who supports this type of reform—conceded to the Times that its impact would be modest. “I don’t think it’s going to create a productivity miracle or anything like that. . . . It would probably improve investment a little bit,” he said.
It is also important to note that Bernanke and most other economists who support this approach endorse revenue-neutral reform, which isn’t what the Administration seems likely to offer. Ryan’s proposal is to offset some of the lost revenues by introducing a sizable “border-adjustment tax” on imports, but the White House apparently doesn’t like this idea. Trump and his advisers also seem reluctant to mess with politically popular tax breaks, such as deductions for mortgage interest and charitable giving. Instead, they have reverted to magical thinking.
According to the nonpartisan Center for Tax Policy, cutting the corporate rate to fifteen per cent would cost about $2.4 trillion over ten years. If you add in all the personal-income-tax cuts that Trump proposed during last year’s campaign, the tab comes to about $9.5 trillion. Even the original Voodoo Economists in the Reagan Administration would have blanched at claims that more rapid economic growth could close a fiscal hole of this size. If the White House persists with its flaky argument, it will have trouble selling its plan to deficit hawks in the Republican Party, let alone to Democrats.
Finally, there is the basic unfairness of it all. In his address to Congress at the end of February, Trump said that he would provide “massive tax relief for the middle class.” But, from everything we know, the primary beneficiaries of his plan will be the very rich. As highly paid executives, they stand to reap big gains from a cut in the top income-tax rate. As owners of so-called pass-through businesses and investment partnerships, they stand to gain from the cut in the corporate tax rate. And as major owners of corporate equities, they stand to gain from the profit-repatriation scheme, the proceeds of which are likely to be largely used for stock buybacks and other financial-engineering schemes.
Until we see the final Trump plan, it won’t be possible to estimate the exact scale of these giveaways. But when the Tax Policy Center looked at Trump’s campaign proposal, which seems to be the basis for what the White House and Treasury Department are working on, they found that more than half of the tax cuts would go to the richest five per cent of households in the country; about two-fifths would go to the richest one per cent; and about a fifth would go to the richest 0.01 per cent.
Doubtless, Trump will persist with the claim that he is working on a populist plan designed to get the economy going. In actuality, he is cooking up a fiscally irresponsible gift to plutocrats.