Trump Unveils Outline of his Pro-Corporate Tax Plan
Trump would be one of the main beneficiaries of his own tax reform proposal, benefitting from the lowering of “pass-through” income, says CEPR’s Dean Baker
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore.
The Trump team released a tax reduction plan for corporations on Wednesday. The proposal includes a reduction of the corporate income tax from 35% to 15% of the elements; include taxing corporate income that goes to individuals, known as pass-through income, at the corporate tax rate, instead of the personal income tax rate.
Treasury Secretary Mnuchin argued that the tax proposal would be the largest tax cut in history. Let’s have a look.
STEVEN MNUCHIN: Right now we have a 35% corporate rate on worldwide income in deferral. It is perhaps the most complicated, and uncompetitive, business rate in the world. Not a surprise that the companies leave trillions of dollars offshore.
Under the Trump plan, we will have a massive tax cut for businesses, and massive tax reform in simplification. As the President said during the campaign, we will lower the business rate to 15%. We will make it a territorial system. We will have a one-time tax on overseas profits, which will bring back trillions of dollars that are offshore, to be invested here in the United States, to purchase capital and to create jobs.
The president is determined to unleash economic growth for businesses. This is not just about large corporations, small and medium-size business will be eligible for the business rate, as well.
SHARMINI PERIES: Joining us now to discuss all of this, is Dean Baker. Dean is a Co-director of The Centre for Economic and Policy Research. And he is the author of, “Rigged: How Globalization and the Rules of Modern Economy Were Structured to Make the Rich Richer”.
Thanks for joining us, Dean.
DEAN BAKER: Thanks a lot for having me on.
SHARMINI PERIES: So, Dean, what do you make of what is, you know, discussed in Washington today, in terms of what’s coming out in the tax reforms?
DEAN BAKER: Well, it’s clear he’s talking about very large cuts for the richest people in the country. Part of this is the corporate income tax cut, which he proposes to lower the rate from 35% to 15%. So, that’s a huge reduction, 60% reduction to rate. But probably even more importantly is what he proposes to do with, what are referred to as “pass-through” corporations. It’s really kind of deceptive.
So, these are businesses, they aren’t probably small businesses, but these are businesses where the corporation actually doesn’t pay tax. It’s kind of a scam already, as far as I’m concerned. But, in any case, what it means is the corporation simply passes the income through to the individuals, who then pay taxes on it as individuals. So, it’s not taxed at the corporate at all.
Now what he’s proposing is to say, “Okay, we’re going to change that. Rather than having the income be passed through these individuals, and pay the individual tax rate, we’re going to let you just pay a 15% corporate tax rate.” Now, for a lot of people that wouldn’t be a big deal, but if you’re in the highest income group, you’re currently paying an individual tax rate of 39.6%. He’s going to lower that to 15%, that’s a huge tax break for very rich people. Very rich people, as I pointed out in a column I did, like Donald Trump.
SHARMINI PERIES: Now, Dean, he says — Mnuchin here, as we saw in the clip — says that the U.S. income tax rate isn’t internationally competitive. What does he mean by that?
DEAN BAKER: Well, something that he, and others often point to, and here he’s talking about the corporate income tax, ’cause our individual income tax is not particularly high. The corporate income tax rate, we have a top rate of 35%, that is higher than most of other countries. But, the issue here is that almost no one pays that. So, if you look at the percent of profits that companies pay in profit, it’s somewhere around 21, 22%, which puts us towards the middle, even a little below the middle of the other wealthy countries.
So, we aren’t imposing a high tax burden on our corporations. We have this high tax rate that very few of them pay. So, in that sense, a lot of people, I think, democrats and republicans both would go along with and say, “Okay, let’s lower the rate some, we’re not getting the 35%, so let’s lower it, we can lower it to 25%, 28%, Paul Ryan said 20%.
You’d fight over that, and look to get rid of the deductions so you actually collect that amount of money. Now, Donald Trump’s gone one step further and said, “Let’s just make it 15%.” So, that is a huge reduction. It’s not needed to make us competitive, it is needed if you want to give more money to wealthy people.
SHARMINI PERIES: Right. And, of course, Mnuchin, Trump and group, argues that these kinds of adjustments in the tax policy, corporate tax particularly, will give a boost to the economy, because they’ll have more money at hand to spend, and create jobs, and so on. What do you make of that argument?
DEAN BAKER: Well, that’s ludicrous on the face of it. I mean, it’s been widely reported for years that, you know, all these corporations are sitting on vast pools money. They’ve been paying that out on dividends, corporate buy-outs. So, the idea that they need money to undertake investment, you’d have to be in the wrong planet to argue something like that.
Now, one way his plan will spur investment — I don’t even know if that’s actually the right word — but you are going to create a massive tax avoidance industry for exactly the point I was making before. That individuals, if you’re a high-end individual, you’re paying tax at the 39.6% top individual rate, they’re going to give you the opportunity to create a pass-through corporation, and just pay 15%.
Well, needless to say, you’ll see a huge industry in creating pass-through corporations. We’ll have a lot of tax lawyers and accountants employed creating tax-through corporations. That’s not particularly good for the economy, but that will employ a lot of tax lawyers and accountants.
SHARMINI PERIES: And this tax theory, really from the Reagan era, in terms of the emphasis on the supply side of economics, what results did it generate in that era that we can learn from today?
DEAN BAKER: Well, again, this is kind of amazing to me as an economist, ’cause there’s a lot of research on this. The idea that we’re going to somehow spur the economy by cutting taxes is, is at best, a very limited affect. It cuts across the spectrum, I’ve found. But in this case we actually ran the experiment twice. We usually don’t get, as economists, the “we” here, we usually don’t get the option to say, “Oh, let’s experiment with this policy.”
But in this case we did. We did it under President Reagan in 1981, huge tax cuts, huge increases in the deficit. We did it again with President George W. Bush in 2001, again, big tax cuts, huge increase in the deficit.
So, you can argue for the tax cuts, all sorts of ways you could argue, but the idea that we’re somehow going to pay for this with increased growth, we’ve been there, we’ve done that, that really is just silly. I don’t believe, like, a serious person would try to make that argument, at this point.
SHARMINI PERIES: And then, finally, in Washington, is he getting any pushback, in terms of this tax policy that he’s proposing?
DEAN BAKER: Yeah, I mean, there’s a lot of people who are prepared to push back in a really big way. We’ve seen the top 1% get the vast bulk of the gains from economic growth over the last four decades. And the idea that the most important thing we should be doing is give them even more benefits, in the form of really big tax cuts. That’s pretty hard to stomach, and there’s going to be a lot of grassroots resistance to that.
And, needless to say Democrats in Congress will respond to it. I suspect maybe some Republicans; you just don’t want to be seen giving even more money to Goldman Sachs, and the richest people in the country.