No, not the “tax fraud” that involves someone cheating our federal government out of what it is due. What we’re going to deal with here, is Trump’s tax plan. Actually, it’s hard to justify calling anything a “plan” when it is published on a single sheet of paper, with wide margins, double-spacing and a generous font. Let’s call it a “sketch” In fact, it more like a “sketchy” sketch.
Without going into arcane details (which Trump has yet to provide anyway), here are some important basics: (1) The existing tax brackets will be reduced in number from seven to just three (2) the corporate tax rate will be dropped precipitously down to 15%; (3) the standard deduction will be doubled; (4) the alternative minimum tax (AMT) will be eliminated; and (4) the estate tax will also be erased from the books.
Impact on the middle class
Of course, at this juncture, we can’t know for sure. But is likely that the middle class will pay less in taxes if they fall into the lowest tax bracket (i.e. 10%), especially in combination with the doubling of the standard deduction. With more money in hand, those in the middle should bump up their consumption which is a good thing because this increase in demand will cause suppliers to ramp up production. In turn, that should lead to more hiring and thus, job growth.
Impact on the richest
Those in the 1% will enjoy a 4.6 percentage point drop in their taxable income from 39.6% to 35%. But, the real boon for them is the elimination of the alternative minimum tax (AMT). This part of the tax code came into being to prevent very wealthy people from paying too little vis a vis their total income. Basically, it requires that a member of the upper crust calculate his/her taxes by the standard means, and then using the formula from which the AMT is derived. The taxpayer then must pony up the higher of the two.
Since its inception and use, the AMT has affected a steadily growing number of taxpayers who have found themselves with a heavier tax burden because of it. With that in mind, you can see how 45’s proposal to repeal the AMT will produce a major windfall for our millionaire/billionaire class. Had that been the status quo in 2005, Trump’s return to the federal treasury would have dropped from $36 million all the way down to just $5 million. (1)
Then there is the ending of the estate tax which is to say yet another major benefit to the wealthiest among us. Now, it would be one thing if the heir(s) to a millionaire’s estate plowed that money right back into the economy in the form of a big uptick in their consumption. But, that’s not what happens. As Thomas Piketty showed in his study of the accumulation of capital, it basically gets hoarded for passage onto the next generation in the family. (2)
Taking the contents of this section into account, there is considerable justification for referring to the president as “Donald the beneficent”. Certainly, he has offered us a tax sketch that is abundantly generous to himself, his family and their ilk, but less so for the rest of America who don’t qualify for his 35% tax bracket.
The past as prologue
Because Trump’s sketch has provided us with so few numbers, and because we have yet to see the real impact of what he has proposed, we are left using history as a guide, Think of it as educated albeit fallible guessing.
The odds are very good that putting more money in the hands of people who are most likely to spend it will boost consumption. In turn, this will spur suppliers to jack up production and hence, take on more workers.
The sizeable lowering of the corporate tax rate is supposed to liberate those business entities to plow more money into research and development, more aggressive marketing, the upgrading of plants and equipment, and even expansion. All this should leads to job growth though that isn’t always the case: Some years back, Coca Cola introduced a new soda that promptly fell flat and allowed Pepsi to gain a larger portion of the soft drink market share.
So far so good; at least as far as predictions go. Now, here’s the downside: All this tax cutting must be equaled by economic growth robust enough to generate the same or a greater amount of federal tax revenues, otherwise, we end up with a budget deficit and yet another addition to the national debt. History shows that has never happened !! Never has this been truer than under Republican presidents; Reagan and both of the Bushes. Provable history shows that the tax cuts pushed by these three never paid for themselves. They all ran deficits and added to the national debt. So, let us attach to the list of predictions, the forecast that like his closest Republican predecessors, Trump’s tax cuts will leave us in another hole.
Once it emerges in final form, what can legitimately be called Trump’s tax plan, will get shaped and re-shaped by Congress, especially the House. If the plan carries with it, strong projections of deficit-spending, look for the “budget hawks” in both chambers to have their economic discipline and frugality tested to the limit. Congressional Democrats will do what they can to contribute to the shaping process. But they are in the minority so the tax plan that eventually gets passed will have “Republican” stamped all over it. Depending on your reaction to it, you’ll know exactly who to cheer or to blame.
- The drop in Trump’s tax burden from $36 million to $5 million was derived from two pages of his 2005 return that was leaked to David Cay Johnson, an investigative reporter who aired it on the Rachel Maddow Show on March 14, of this year.
- See Thomas Piketty’s Capitalism in the Twenty-First Century. Published by Brillance Audio in 2014.