President Trump wants his proposed tax cut to be the biggest ever. It won’t be. The national debt is too large, and the economy too squishy, to risk the explosion of debt that a giant tax cut would require. Ronald Reagan didn’t face such severe limitations when he cut taxes in the 1980s.
Trump might still be able to wrangle some tax cuts, but only if he compensates with other measures that would raise revenue and keep the debt from rising by much, or at all. Given that Democrats may oppose his plan en masse, much as they opposed his effort to repeal the Affordable Care Act, Trump would have to appease Republican budget hawks who aren’t keen to take on more debt and are a powerful faction within the party.
A good blueprint to the kind of tradeoffs required is the tax-reform plan published in 2014 by Republican Rep. Dave Camp, who at the time was chairman of the House Ways and Means Committee. Camp’s plan was designed to lower rates, close loopholes, make the tax code more efficient and stimulate the economy—without adding to the national debt. Tax experts generally viewed it as serious and credible. Camp retired shortly after introducing his plan, which, lacking another ardent supporter, never came up for a vote.
Trump’s tax outline has a long way to go, since it omits all the details that make tax reform so difficult. But if Trump and his fellow Republicans in Congress put in the work, they might be able to pass tax cuts that look something like this:
The corporatetax rate is currently 35%, which is the highest rate among developed nations. Many Democrats agree with Republicans that it ought to be lower. But Trump’s targeted rate–15%–is too low, because there’s no way to cut it that far without leaving a gaping hole in the federal budget. House Speaker Paul Ryan has a plan that would lower the tax rate to 20%, but that relies on an unpopular “border adjustment tax” to raise offsetting revenue, which would probably die in the Senate.
What’s plausible: A rate of 25%, or thereabouts. That’s what the Camp plan aimed for. Even that would require other changes that raise offsetting revenue.
Foreign profits are a problem, since many big US companies choose to keep them parked overseas instead of bringing them home and paying US tax. Trump wants to move to a “territorial” system in which foreign profits of US companies are taxed where they’re earned, with no additional US tax. He also wants to establish a one-time repatriation tax, at a low rate not yet specified, that would allow American firms to bring back more than $2 trillion in profits, pay a tax rate much lower than 35%, and spend or invest that money in the United States.
What’s plausible: Trump could get both of these measures if the rest of the plan fell into place. Most nations the United States competes with have a territorial system, so it makes sense to join the club.
Individual income tax rates. Trump’s proposal on this matches the Camp plan. He’d condense seven brackets now to three—10%, 25% and 35%, with the top rate falling from 39.6% to 35%.
What’s plausible: Trump could get these rates—but only with sharp cuts in deductions and other tax breaks currently taken by millions of filers. Those changes would be necessary, again, to raise the revenue needed to lower rates.
Pass-through rates, which apply to many small and privately owned businesses—including the Trump Organization—are currently the same as individual income tax rates. In other words, most business owners pay tax at individual rates, not corporate rates. Trump wants to change that, by letting pass-through entities pay at the much lower corporate rate he proposes, 15%.
What’s plausible: Something a lot less generous than Trump’s proposal. Many business owners pay tax at the top individual rate of 39.6%, so they’d get a giant tax cut if the rate fell to 15% or even 25%. That would dent federal revenue and be politically treacherous – particularly because Trump’s own real-estate company would be a major beneficiary. Camp’s plan left pass-through entities alone, though they would have benefited from the drop in individual rates Camp proposed.
Individual deductions would have to be reined in. Trump wants to kill the federal deduction for state and local taxes, while doubling the standard deduction, to around $24,000 (for taxpayers filing jointly). The idea is to encourage more people to claim the standard deduction and fewer people to itemize, which is where many of the inefficient loopholes pop up.
What’s plausible: Killing the deduction for state and local taxes is a start, but Trump would have to go much further to make up for revenue lost by cutting individual and corporate rates. The Camp plan, in addition to killing the state and local deduction, also put new limits on deductions for charitable contributions and mortgage interest. Another big change: The Camp plan would have counted the value of employer-provided health insurance as income, subject to tax. Those three changes alone would be enormously controversial, and subject to relentless lobbying aiming to keep the deductions in place. It’s possible taxpayers would end up better off with lower rates and fewer deductions, but if tax reform goes in this direction, alarmist rhetoric from interest groups at risk of losing favored tax breaks will make it sound like the end of civilization is nigh.
Estate taxes affect a tiny portion of the population, but Trump wants to kill them anyway.
What’s plausible: The Camp plan left the estate tax intact. It’s likely Trump’s plan will too, in the end, since it affects mainly the wealthy, who would already benefit from other provisions of Trump’s tax plan.
Capital gains taxes are lower than taxes on ordinary income, and Trump wants to lower them a bit more.
What’s plausible: Changing the method, but retaining the tax. Camp wanted to change the way capital gains are taxed, but his method would actually have brought in a bit more revenue from capital gains. Trump may have no better options, and end up leaving cap-gains taxes as they are.
Trump and his top economic advisers also claim that slashing taxes will boost the economy so much that tax revenue will actually rise–an old supply-side argument that’s never been proven. Even if this were true, there’s an inherent problem: Tax cuts that reduce federal revenue, on net, add to the national debt right away, necessitating a prompt increase in federal borrowing. If, in the best-case scenario, tax cuts also boost growth, incomes and tax revenue, it would still take years to trim the debt back to where it started. In the meanwhile, there could be a recession or other event that disrupts the economy and wrecks the whole theory. Trump doesn’t seem to think it could happen to him, so it could be a while before he’s willing to consider the tough tradeoffs that come with the goodies on tax reform.
