Some Points You May Have Missed on Trump’s Ill-advised Tax Plan
As you’ve probably seen, Donald Trump talked mostly tax policy yesterday in a big speech in Detroit. He’s amending his original tax plan, which I guess he no longer thinks is as awesome and amazing as when he first introduced it. Here are a few points which, amidst all the hoopla, you might not have picked up on.
Interestingly, the plan is pure, old-fashioned, supply-side, trickle-down orthodoxy. How that squares with Trump’s play for disaffected working class voters hurt by globalization is left as an exercise for the reader (because I don’t get it). Believe me, those voters benefit not one cent from eliminating the estate tax. I assume his motives are a) a sop to the top 1% who fund such campaigns, b) a way to shrink gov’t by starving it of revenues, and c) a signal to the Ryan wing of the party that “despite all the cray-cray, I’m really with you re the parts you care most about (eg, a and b).”
–He claims to close one loophole but opens up a much bigger one. This, to me, is a big deal that’s easy to miss. I’m talking about the Trump plan for a 15% tax rate on “pass-through” income.
His updated plan sets the top income tax rate at 33% but creates “a much lower rate than 33 percent for a substantial number of very-high-income households by allowing people to pay a new low rate of 15 percent on “pass-through” income (business income claimed on individual tax returns). More than two-thirds of all pass-through business income flows to the top 1 percent of tax filers (see figure).”
This invokes Jared’s first rule of tax avoidance: when you can pay a lower a rate on a particular type of income, lo and behold, it turns out that’s the very type of income you now have gobs of!
Being of sound fiscal personality, I probably wouldn’t go there, but if you’re in the top income bracket, any putz with a tax lawyer will march into their boss’s office and declare that “I’m no longer Joe Paycheck, I’m Joe Paycheck, LLC. Pay me the same salary but call it a consultant’s fee for services provided by my limited partnership.” Joe then passes that income through from the business to the personal side of the tax code and pays 15% on it.
There are rules against such avoidance, but they’re rarely enforced; distinguishing salary from profits in such cases is more art than science. Marr and Huang provide the details here.
One has little trouble imagining hedge fund and private equity managers making this move. Right now, the carried interest loophole lets them pay 24% on their earnings as opposed to the 40% they should be paying. Under Trump, by tapping the pass-through loophole, they’ll pay 15% instead of 33%. So, basically, he lowers, not raises, their tax burden, and by a lot (-9 ppts: 15-24).
–Repeal the estate tax: This one also risks getting lost in the mix. But it’s just a pure sop to a tiny group of really rich families, a classic example of rich donors buying tax breaks for themselves (that would include the Trump family themselves, though hard to know without seeing the Donald’s taxes).
Because the exemption is already so high–$11 million for a couple—only 0.2% of estates (that’s 2 in a 1,000) pay it. The average benefit to these estates, were the tax repealed, is $3 million. And please spare me the BS around “small family businesses” and “family farms.” The families—and again, there are hardly any of them (in a classic NYT piece, the paper exhaustively looked for one family farm that qualified and couldn’t find one)—with estates above the threshold may not be GE, but neither are they the mom-and-pop hardware store on the corner.
–The new child-care deduction: Trump added a new idea: a tax deduction for child-care costs. The problem here stems from the difference between a deduction and a credit. Deductions are “upside-down” tax breaks. That is, since you deduct expenses according to your tax rate, those with higher incomes and thus higher tax rates get a bigger break. Moreover, if you face no federal tax liability at all, as is the case for 44% of households (the vast majority of whom pay some other form of taxes), this can’t help you because you’ve got no liability against which to deduct the cost of care.
Refundable tax credits work like a negative tax in this context, and I’ve read some references that this is where the Trump team wants to go with this, but they’re clearly lurching about here and don’t seem to have any expertise in this space.
Which leads me to this final point. Some argue that the above critique is ill-considered, not because it’s incorrect but because it credits an incoherent candidate with coherent plans. I freely admit that what Trump says on Monday, he often contradicts on Tuesday, and perhaps I’m mistaken to take this stuff seriously. But my point is that if you do so—if he really means it—it’s terrible policy.
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This was reposted from On the Economy.
