Donald Trump, Tax Cuts for the Rich Won’t Boost the Economy
For all the talk of high-minded, growth-oriented tax reform, all the Trump administration offered on Wednesday as the president announced his tax plan was an unsurprising package of tax cuts for the rich and corporations: Top-earning individuals will be taxed 35% instead of 39.6%, big businesses will be taxed 15% instead of 35%, and it will all be financed by debt.
The sparse, one-page proposal actually doesn’t deviate much from Trump’s campaign plan, which the Tax Policy Center (TPC) estimated would raise the national debt by $7.2 trillion over the first decade, and by $20.9 trillion over two decades.
Despite claims from the administration, economic growth will absolutely not make up the difference. While the economy could still benefit from a short-run fiscal boost to spending, tax cuts for the rich are a terribly inefficient way to do this. High-income households save more than low- and moderate-income ones, so any fiscal measure aimed at boosting demand should be targeted away from the rich, not toward them.
Prospects for boosting growth with tax cuts over the longer horizon look nearly as bleak. Cuts to the corporate income tax increase profits, but those profits eventually go to shareholders in some form. This increases the returns to savings, which incentivizes households to save more instead of spending. But this channel looks like it will be very weak in coming years, as there has been a savings glut for the past decade or more. This means that increasing the supply of savings is not really relieving any constraint on growth. Further, cuts to the corporate income tax incentivize all private savings (including household and business savings), but if cuts aren’t offset by either reductions in spending or increased tax revenue from other sources, they reduce public savings by increasing the deficit. In the long run, this pushes up interest rates, which would then discourage private savings. Supply-side economics has been tried time and time again, and tax cuts simply do not spur much growth at all, let alone enough to pay for themselves.
Importantly, TPC included estimates that account for the rate cuts’ effect on economic growth—so-called “dynamic scoring” estimates. For the reasons noted above, adding dynamic effects changes almost nothing. In the long run, TPC estimates that the Trump administration’s tax cuts would actually slow economic growth. The national debt would increase by $7 trillion over the first decade, and $22.1 trillion over two decades. There is no growth bonanza that will be unleashed by these tax cuts.
The details on the individual income tax side seem less fleshed-out, though the headline is cutting rates for the top tax bracket back to Bush-era levels. The Congressional Budget Office noted that three-quarters of the corporate income tax falls on business owners and other owners of capital. Since the top 1% of households earns about 54% of all capital income, and the bottom 90% earns only 22%, this makes the existing corporate income tax sharply progressive—and hence means that cutting it would be a major giveaway to those at the top.
And these benefits will not trickle down. The rich and large, multinational corporations will certainly benefit from a cut in the corporate tax rate, but low- and middle-income families will not. In the long run, to pay for existing commitments to social insurance and income support programs, as well as make necessary public investments, we will need more revenue, not less. And growing income inequality means that tax reform should look to obtain that revenue from progressive sources—like the corporate income tax.
A new and clearly unwelcome twist to the plan is a provision to allow “pass-through” businesses— businesses where all income is “passed through” to owners and currently taxed at their individual income rates—to take the 15% rate as well. With this loophole, high-income individuals could avoid paying the top tax rate by simply calling themselves independent contractors and taking the new pass-through rate. This isn’t speculation. Kansas introduced such a pass-through loophole in its tax cuts package, and revenue hemorrhaged as individuals re-classified themselves as independent contractors, including University of Kansas men’s basketball head coach Bill Self.
What’s more, the Trump administration has proposed making the loophole through which multinational corporations dodge paying their taxes permanent. Currently, multinational corporations use myriad accounting gimmicks to claim that they made their profits offshore in tax havens. They do so because of a loophole known as deferral. Ostensibly, the current tax system is supposed to tax U.S. multinational corporations on a worldwide basis. But the deferral loophole allows multinational corporations to simply put off paying U.S. taxes on their offshore profits by claiming they are “permanently reinvested.”
In response, U.S. multinationals have now stashed a record $2.6 trillion in profits offshore. The Trump administration wants to make the loophole permanent. They would change the corporate income tax to a territorial basis—whereby U.S. multinationals would owe no taxes on their offshore profits. No multinational corporation with accountants worth their salt would ever pay taxes again. And some will even look to genuinely offshore production since profits made overseas will be taxed more lightly than those earned at home. Why the generally mercantilist Trump administration has decided to provide a hard nudge offshore for U.S. corporate business is an interesting question.
By making a loophole for large U.S. multinationals permanent, and adding a new loophole for those at the top, the Trump administration has proved that, just like House Republicans, they are not interested in tax “reform,” but rather tax cuts for the rich. If the administration intended tax reform, they would be closing loopholes—not making them permanent and opening new ones.
Hunter Blair is a budget analyst at the Economic Policy Institute.