Trump’s Tax Giveaway to the Rich Won’t Boost Economy
Donald Trump’s tax plan lowers highest income tax bracket and the corporate tax rate and eliminates the estate tax and the alternative minimum tax, all of which will massively benefit him and his rich friends, explains CEPR’s Dean Baker
Gregory Wilpert: Welcome to The Real News Network, I’m Gregory Wilpert coming to you from Quito, Ecuador. President Trump presented more details of his tax overhaul proposal on Wednesday. The plan, as expected, aims to lower both individual and corporate tax rates, to eliminate the alternative minimum tax and the estate tax, and to provide an incentive to repatriate offshore profits, among many other things. Here’s what Trump had to say when he presented the plan.
Donald Trump: Our country and our economy cannot take off like they should, unless we dramatically reform America’s outdated, complex and extremely burdensome tax code. It’s a relic. We’ve got to change it. We have to compete. Compete with other countries. The current tax system is a colossal barrier standing in the way of America’s economic comeback, because it can be far greater than it’s ever been. We’re going to remove that barrier to create the tax system that our people finally, finally, finally and want and deserve.
Gregory Wilpert: Joining me to analyze the proposal is Dean Baker. Dean is the Co-director of The Center for Economic and Policy Research and is the author of “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” Welcome back, Dean.
Dean Baker: Thanks for having me on.
Gregory Wilpert: There’s a lot we can go over, but we’ll stick to the most important features of this proposal. Let’s start with the individual and household taxes: the Trump plan wants to reduce the number of tax brackets from seven to three with tax rates of 12%, 25%, and 35%. Also, he would increase the standard deduction from $12,000 to $24,000. What do you think of this aspect of the plan?
Dean Baker: I guess, to put it this way, it’s not as bad as many of us thought it could be, so the top bracket goes from 39.6% to 35%, so it’s not as though these people need a tax break, but that’s a smaller tax break than had been advertised in prior version. As far as that goes, it’s not as bad as it could be, but still, a very big tax break. Someone earning a million a year, that’s a tax break of $40,000. That’s a lot of money.
The standard deduction, that goes along with eliminating the personal deductions, the individual deductions, so that’s actually not that much of an increase. What that will do is, it means that many fewer people will itemize that, in principle, it’s not a bad thing, but what it would mean among other things, is basically you get rid of any real rationale whatsoever for the mortgage interest deduction because basically no middle income, moderate income people are going to be itemizing, which means the only people getting the mortgage interest deduction will be relatively well-off people who would buy a home with or without it. That’s not a great story.
I guess, what I’d say is it’s not as bad as it could be, but I can’t see any good rationale for giving tax break to the people, the big winners in the economy over the last four decades.
Gregory Wilpert: Right. Next, in terms of the business taxes, the plan would do two main things, I guess: one is to reduce the corporate tax rate from 35% to 20%. The other is it would lower the taxes for the so called pass through businesses, that is where companies that have partnership, for example, would get instead of paying the normal individual tax rate that they would pay, they would have to pay only 25%. What is your response to these two things, two reductions, the corporate tax rate and the pass through business tax?
Dean Baker: These are likely to be big tax breaks for high-end individuals. The corporate tax rate, they have justified lowering the tax rate by saying that we have among the highest in the world, which is true, the statutory rate. In terms of what we actually collected, it was somewhere around 22% of corporate profits, which put us right around the middle of the pack.
Now, if we make the statutory rate 20%, presumably they’ll get rid of some deductions but surely the statutory rate will fall two, three, four percentage points below that, which means we’ll be collecting substantially less money in corporate income tax.
Now, one of the important deductions is for interest. Here is one of the bizarre things. They say, “Oh, we’re going to limit the corporate interest deduction,” but it doesn’t say how. That, in principle, would be a very good thing if they sharply limited it, but they didn’t care enough to put in a rate.
Now, the pass through corporation, this is potentially a huge bonanza for very wealthy people, I should point out, including Donald Trump who has most of his businesses as pass-through corporations. What a pass-through corporation means, it pays zero tax. The corporation itself pays zero tax. It goes back to the individual and where that individual is a very wealthy person, like Donald trump, they’d be paying tax at the high individual income tax rate or higher, which in his case, say this goes through, that’s 35%. Instead, he’ll just pay 25%, and what that means is you give people a very big incentive to become corporations to have their doctors, lawyers, other professionals will have most, or all their income as corporate pass through and they’ll just pay a 25% tax rate.
Here, too, we get a magic asterisk. They say they’re going to have the IRS police this to make sure it’s not abused. Well, the republicans have spent two decades weakening the IRS’s enforcement power. This would be extremely difficult thing to enforce, even if you had a very effective IRS, which they’ve done a lot to make sure we do not have.
Gregory Wilpert: Then, another related aspect is the whole thing about the repatriation of corporate taxes. It’s estimated that something around $700 to $800 billion are being held offshore by U.S. companies because their corporate tax is made abroad. They’re keeping them there, so they don’t have to pay the corporate taxes. Trump wants to provide a tax incentive, basically a lower tax rate for temporarily, so they repatriate their profits. What do you think of that plan?
Dean Baker: Let me clarify that. He’s talking about actually making that permanent. We would switch to a territorial tax system, so that they would never have to pay taxes on foreign profits. This is a big bonanza. You have a lot of companies, maybe the most successful companies in the country that declare a lot of profits overseas precisely so that they don’t have to pay taxes here, and at least as an accounting convention they keep the profits over there in many cases, The Wall Street Journal did a piece on this a few years back. The money is literally here in the United States. It’s kept in banks in the Unites States, but at least as an accounting matter, it’s still with their Irish subsidiary, or Cayman Island, or wherever they’re booking it, so they don’t have to pay taxes on it.
The talk had always been, we did this is 2005, you give them a lower tax rate for a period of time, they bring it all back, and then they start to accumulate it again. Trump’s saying, “No, we’ll just let them bring it back, no taxes.” That’s just inviting companies to shift more of their profits overseas because we’re living in a world where it’s very easy to say that instead of your profits being earned in the United States and you’ll pay the corporate income tax here, you had your profits earned by your Irish subsidiary where the tax rate is 12.5% Basically, it’s a green light to do more of that.
Gregory Wilpert: I guess, similar issues, of course, with the alternative minimum tax and the estate tax, which would also be eliminated and therefore save a lot of money. I guess, the rationale is that the more money that they have in their pockets, the more there’s going to be to help the economy. I want to get to that point again later on, but what about the elimination of those two taxes, the alternative minimum tax and the estate tax?
Dean Baker: The alternative minimum tax was a catch-all. Basically it says no matter how many games you played that at the end of the day, you still had to pay, I think it was set at 20%. It only applied to a relatively small number of people. Donald Trump, actually ended up the one tax return that was released, or leaked out 2005, he paid the alternative minimum tax because he had enough deductions of different sorts, he would have paid less, so he still had to pay the 20% alternative minimum tax.
I don’t see a good reason for eliminating that. It applies to a very small number of people. Basically by definition, they’re wealthy because there’s a very big floor to it. Unless you’re earning a lot of money, you don’t have to worry about it. Again, unless you’re playing a lot of games, it’s moot. I don’t really see a downside to it. I don’t see anything whatsoever gained by eliminating the alternative minimum tax.
The estate tax, this too, applies only to very wealthy people. People are allowed to exempt 4 million per a person, so a married couple could pass on $8 million totally tax free. It applies to, I think it was two-tenths of 1% of estates. A very tiny number and I just don’t see a good argument as to why we shouldn’t be taxing these people. We’re going to get the money from lower income people instead? I really don’t see a downside to the estate tax, and it’s just unfortunate if we give up that revenue.
Gregory Wilpert: As I mentioned, one of the main Republican arguments, of course, in favor of lowering taxes more generally and it’s an argument that’s been around since President Reagan, is that lower taxes for both corporations and households would mean more money for spending and for reinvestment and therefore more economic growth and, of course, that this would pay for itself. What’s your response to that relatively old argument?
Dean Baker: This is one of the rare cases where we actually had the opportunity to test it. Economists, we can come up with all sorts of theories and we try to find a way to, what looks like that. In this case, we actually did it. They did it under Reagan, they did it under George W. Bush. There’s basically, zero evidence that led to any increase in growth. The growth was okay in the 80s, was not particularly strong, growth was very weak after the tax cuts that Bush put in place in 2001 and 2002. I wouldn’t necessarily blame the tax cuts for the weak growth but you’re pretty hard pressed to argue the opposite that somehow we had very strong growth but something happened and that prevented us from having good growth.
The one thing I will say for reducing complications in the systems, loopholes, basically, that is a way. That’s why I have, actually been sympathetic to the idea of lowering the corporate tax rate coupled with reducing the deductions, because the tax avoidance system is a major source of inequality. You have a lot of people on Wall Street who come up with clever tax avoidance schemes and they get very rich that way. I can’t see any reason we want people to get rich designing tax avoidance schemes. We could argue how much money we should make from designing a good product or whatever, but I can’t see any rationale for saying, “Oh, we want people to get real rich ’cause they’re clever at avoiding income taxes.” I think there’s something to be said for that, but it’s not clear how much we’re doing to combat tax avoidance with this reform plan.
Gregory Wilpert: Finally, I just want to touch on the issue of the impact that all of this would have on the government. As I mentioned, and even Trump acknowledges this that it would lower revenues overall, the administration estimates that it would reduce revenues by about $1.5 trillion over 10 years, but other outside studies have gone as high as 7 trillion over the next 10 years. Where do you think that number is more likely to end up? What would this mean for basically for the structure and functioning of the government?
Dean Baker: There’s a lot of unknowns here in terms of what rates get put in place where. It’s a little hard to produce an estimate. The seven trillion made some strong assumptions. This was following a plan that Trump had put forward during the champaign, which this is considerably less generous than that plan, so clearly it would be less than that seven trillion.
It won’t surprise me if it runs to two or three trillion. That’s a lot to add to the deficit over the course of a decade. That’s, let’s say, 1.5%, 2% of GDP. I don’t see that as a disaster for the economy. What I guess, I would worry about more than anything is that we get this incredible hypocrisy, we just see it again and again that you have a big tax cut and then all the people pushing the tax cuts go, “Oh my god, we have large deficits, we have to cut spending.” Needless to say, the spending they’ll be looking to cut is the spending that goes to help lower income people, middle income people, probably not looking to cut the military, which they’ve been looking to increase. That’s my biggest concern. I’m less concerned about the deficits. They might end up being somewhat bigger than what would be desirable, but I’m less concerned about that.
I’m more concerned about the deficit hawk reaction that, “Oh my god, we have big deficit, we have to cut social security, we have cut food stamps, we have to cut these other programs that people depend on.”
Gregory Wilpert: Okay. We’ll probably come back to this again once the plan is in more detail and more fleshed out. I was talking to Dean Baker, the co-director of The Center for Economic and Policy Research. Thanks for talking to me again, Dean.
Dean Baker: Thanks for having me on.
Gregory Wilpert: Thank you for joining us here on the Real News Network.