An analysis of Donald Trump’s proposal for overhauling the federal tax code found that, depending on which version of Trump’s promises you choose to believe, it will cost the Treasury at least $2.9 trillion in lost revenue over ten years, and possibly as much as $5.9 trillion. While an enormous sum, which the Republican presidential candidate has made no serious attempt to offset with spending cuts or other revenue increases, the plan would add less to the federal debt than a previous Trump proposal, which weighed in at around $11 trillion.
The plan would consolidate the personal income tax bracket system and lower the top rate to 33 percent. While it would eliminate many deductions, it would also hike the standard exemption and place limits on deductions for high income individuals. Many low-earning people would owe no federal income taxes at all. However, the percentage change in after-tax income due to the proposal would be much higher among the wealthiest than it would among the poorest. It would also eliminate the estate tax, which affects only a small percentage of the wealthy.
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Businesses would benefit from a dramatic rate cut and would have new options for reducing taxes by expensing investments immediately.
Many of the provisions are fairly straightforward, whether you agree with them or not. But the overall impact of the plan on the national debt remains unclear.
The reason for the wide range in estimates put forward by the Tax Foundation on Monday is two-fold. As is its practice, the non-partisan but conservative-leaning group did two different analyses. One is based on a static model, which predicts a loss to the Treasury of between $4.4 and $5.9 trillion over ten years. The second analysis uses what’s known as a dynamic model, which tries to take into account the effects that the plan might have on economic growth and the follow-on impact on tax revenues and other factors. That estimated the range of losses to the Treasury at between $2.6 and $3.9 trillion.
The reason for the range within each of the estimates produced by each individual model is confusion over whether and how Trump plans to tax “pass-through” business income under his plan. Pass-through income is earned when the profits from a business are all passed directly to the owner and are taxed as personal income rather than business income. Trump’s plan would slash the business tax rate paid by C corporations from 35 percent to 15 percent, which is less than half of the top marginal income tax rate for individuals.
Vague language in the materials released by the Trump campaign makes it unclear whether pass-throughs would be eligible for the 15 percent rate on business income or not. And the Trump campaign did little to resolve the situation last week, sending different signals to different constituencies.
So, rather than try to make the call on their own, Tax Foundation researchers presented figures for each of the possible scenarios.
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“The Trump tax plan as outlined in September 2016 is a large tax cut, mostly on individual and corporate income,” the Tax Foundation concluded. “This plan would significantly reduce the cost of capital and reduce the marginal tax rate on labor. These changes in the incentives to work and invest would increase the U.S. economy’s size in the long run, boost wages, and result in more full-time equivalent jobs.
“On a static basis, the plan would reduce federal revenue by between $4.4 trillion and $5.9 trillion, depending on policy assumptions about business tax rates. However, due to the larger economy and the significantly broader tax base, the plan would reduce revenue by between $2.6 trillion and $3.9 trillion over the next decade, depending on those same policy assumptions. In all cases, it would increase after-tax incomes for all income groups, but reduce revenue to the Treasury.”
However, the Tax Foundation also notes that the analysis doesn’t make any assumptions about how the tax cuts would be paid for, or what the impact of sharply reduced federal spending or a large increase in the national debt would have on the economy.
“This plan is a large net tax cut, and therefore, the need to finance it is likely to have macroeconomic impacts of its own,” they found. “These macroeconomic impacts could vary depending on how and if the tax cut is financed.”
And so far, Trump has shown no indication of how the plan would be paid for.