Trump Probably Picked the Worst Time to Propose a Giant Tax Cut
Back in 1984, I read with delight the Treasury Department’s 500-plus-page, three-volume treatise on tax reform, which eventually led to the landmark Tax Reform Act of 1986. I liked it so much that I quit my academic job to work for Ronald Reagan’s Treasury. After 40 years, it’s definitely time for another tax reform. But this time is different.
Last week, President Donald Trump signaled that tax reform was a high priority for his administration by visiting the Treasury Department and ordering Treasury Secretary Steven Mnuchin to get it done within a week. The promised “big announcement” came on Wednesday: a one-page bulleted list of tax cuts and unspecified loophole closers. Mnuchin and National Economic Council Director Gary Cohn gamely spent half an hour not answering questions about specifics, with variants of, “We’ll get back to you on that” and, “We look forward to working with Congress.”
The instant tax reform is easy to summarize. Cut the top tax rate for individuals from 39.6% to 35% and the top rate on corporations by 20 percentage points, from 35% to 15%. Repeal the estate tax and the alternative minimum tax. Eliminate the 3.8% Obamacare surtax on the investment returns of high-income taxpayers. In exchange for a one-time levy on untaxed foreign profits, exempt U.S. multinationals forever from U.S. tax on their foreign income. The hard choices about which “special interest provisions” and “targeted tax breaks that mainly benefit the wealthiest taxpayers” will be on the chopping block are unspecified.
The one tax reform feature that President Trump seems to feel very strongly about is that business tax rates should be cut to 15%. I get it. He thinks that the low corporate tax rate would encourage multinationals to move more of their operations back to the U.S. Maybe, but only until our competitors follow suit with their own tax rate cuts, as they did after we undercut other countries’ rates in 1986. And Trump thinks that a super low tax rate on small businesses would stimulate a wave of entrepreneurial activity. More likely, it will lead a lot of rich people to pretend to be entrepreneurs to take advantage of the low rate.
Trump’s advisors think that Treasury regulators can outsmart an army of tax advisors commissioned to exploit this juicy new loophole, which is touching, given Trump’s general disdain for government regulation. The only sure way to keep well-advised taxpayers from exploiting a loophole is to eliminate it.
Although the plan is impossible to score given the astonishing lack of detail, it appears to be a massive tax cut, mainly benefiting high-income people. The Committee for Responsible Federal Budget guesses that the plan would add $6.2 trillion to the debt over the next decade—about $1 trillion less than our estimate of the Trump campaign’s last proposal.
It turns out that 2017 isn’t 1984. The 1984 tax reform blueprint was carefully thought out and painstakingly detailed. The 2017 tax reform is “one of the biggest tax cuts in American history,” according to the administration. They’ll get back to us on the details. In 1984, President Reagan was alarmed about a national debt that totaled 33% of GDP and insisted that his plan would not add to deficits. In 2017, the debt stands at 77% of GDP. The Congressional Budget Office projects that the debt burden will almost double over the next 30 years unless policy changes. In 1984, baby boomers were entering their peak earning years and paying more taxes. In 2017, the boomers are retiring, imposing unprecedented burdens on the federal government to pay for promised retirement and health benefits. Not a great time for a giant tax cut.
Not to worry, says Secretary Mnuchin. Trump’s economic plan “will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues.” In reality, a plan like this would give the economy a short-run boost, but rising federal debt would eventually push up interest rates, crowding out investment and discouraging purchase of homes, cars, and other big-ticket items. The drag on the economy from the debt would more than offset the positive effects of lower interest rates.
Trump’s “tax reform plan” isn’t tax reform and it isn’t a plan. To borrow an analogy from the president’s favorite sport, he should take a mulligan and swing again at tax reform after he’s brought on a tax policy team and they’ve had a chance to do their homework.
Len Burman, is an institute fellow at the Urban Institute, co-founder of the Tax Policy Center, and Paul Volcker Professor at the Maxwell School of Syracuse University.