Donald Trump fancies himself a financial whiz and an original thinker, but his tax plan—characteristically vague though it is—runs up against the same problems faced by Jeb Bush and many other would-be tax-cutters and repeats their errors: It is nearly impossible to cut federal income taxes in a way that primarily benefits low-income Americans, because high-income Americans pay most of the federal income taxes.
The 2.4 percent of households with incomes in excess of $250,000 a year pay about half of all federal income taxes; the bottom half pays about 3 percent. It is not only the case that low-income Americans pay much more in payroll taxes than in income tax—that’s the case for all taxpayers save those in the top 20 percent of incomes. But we are committed to our national superstition that these Social Security and Medicare taxes are some sort of “contribution” to a retirement fund—they are no such thing—which means that serious payroll-tax reform rarely is on the agenda.
The centerpiece of Trump’s proposal is a zero income-tax rate for households with incomes up to $50,000 for married couples and $25,000 for individuals. Zeroing out income taxes for households at $50,000 and under sounds like a program aimed at the middle class and lower-income households, but it isn’t, really, because of how tax brackets work: Setting the rate at zero on the first $50,000 is a tax cut for households making $48,000, true, but it’s also a tax cut for households making $100,000, which would under the Trump plan pay $0.00 on their first $50,000 in income. For an unmarried taxpayer with no dependents earning $22,000 a year, Trump’s proposal represents about a $700/year tax cut; for a married couple earning $200,000, that’s going to be a much bigger tax cut, more than $6,500 a year. (Which is to say, the $1,845 they’d have paid on the first $18,450 of AGI plus the 15 percent they’d have paid on the amount between $18,451 and $50,000, plus the difference on the lower brackets on the rest. As always, check my English-major math.)
The median household income in the United States is only about $52,000 a year—it does not seem to me socially desirable (to say nothing of fiscally desirable) to have a tax system in which practically all those who pay the federal income tax are high-income households.
The Trump tax cuts would not be very large for lower-income households, because those households don’t have a lot of federal income taxes to cut. But there are a lot of them. Trump’s plan—which resembles Jeb Bush’s plan to a suspicious degree—would by Team Trump’s own reckoning take 31 million households off the tax rolls, and it would substantially reduce taxes for a lot of households making more than $50,000 a year, too. The idea that this is going to be made revenue-neutral by dickeying around with deductions—while sheltering all of the big, popular deductions, such as the one for mortgage interest—is pure fantasy.
All the cheap talk about “hedge fund guys” and carried interest isn’t going to make up that lost revenue, either, especially when you add in the cuts to the corporate income tax, etc. For all of the awed talk about hedge funds, their profits are not nearly large enough to rely upon taxing them heavily to close our national fiscal gap. Certainly not under Trump’s plan: Bumping a couple of hedge funds and private equity firms from the top long-term capital gains rate of 23.8 percent to a top personal tax rate of 25 percent isn’t going to generate a lot of revenue. In fact, it very well may constitute a tax cut for at least some of those financiers, who do pay ordinary income tax rates on a substantial share of their incomes.
Trump’s other big idea—also one of Barack Obama’s big ideas—is to attempt a forced repatriation of companies’ overseas profits, offering a sweetheart rate (10 percent) to soften the blow. This moves in precisely the wrong direction: The United States maintains a counterproductive tax system that presumes to tax the worldwide activity of U.S.-based companies; most advanced countries use a “territorial” system, meaning that they tax activity within their actual jurisdictions. (It is not clear where the U.S. government imagines that it gets the power to take a piece when a U.S. company builds a widget in South Korea and sells it in Switzerland.) This would simply create yet another incentive for U.S.-based firms to move their headquarters abroad to jurisdictions with less insane tax and regulatory environments, or to engage in ever-more-complex tax-avoidance shenanigans.
Thoughtless? Criminally simple-minded? Sure, but par for the course for a guy who just went on 60 Minutes and proposed inventing Medicaid.
Republicans need to get it through their heads: This country doesn’t need another tax-cut plan—it needs a spending-cut plan.