3 Ways Trump’s Tax Proposal Could Change the Economy
Policy + Politics

3 Ways Trump’s Tax Proposal Could Change the Economy

Jonathan Ernst

Tax policy experts have now had nearly 48 hours to digest the proposal outlining President Trump’s vision for tax reform. The almost-uniform conclusion about the single page of bullet points presented by White House economic adviser Gary Cohn and Treasury Secretary Steve Mnuchin on Wednesday is that there is too little detail in most areas to make many meaningful predictions about the plan. And where there are some details, they appear to point the federal government toward much higher deficits.

There seemed to be a bit of an informal competition between economists in their efforts to describe just how skimpy the document produced Wednesday really was.

Related: Winners and Losers from Trump’s New Tax Plan

At the Tax Foundation, analyst Scott Greenberg didn’t even deign to call what the White House released an actual “plan.” It was, he wrote, “a document with a set of proposed goals for an overhaul of the federal tax code.”

Others were more caustic.

“Trump has not given the public a plan,” wrote Howard Gleckman, of the Tax Policy Foundation. “He hasn’t even produced a complete outline. Instead, we have an aspirational black box that leaves nearly all the gory details to others.”

“The biggest problem with President Donald Trump’s new tax plan is that he still doesn’t have one. Not really,” wrote James Pethokoukis of the American Enterprise Institute. “What [Cohn and Mnuchin] presented Wednesday was really more of a synopsis of a summary of a sketch of some old campaign ideas, with a few (far too few) numbers thrown in.”

Related: A Major Hurdle Facing Trump’s Tax Plan

With that in mind, here are some areas in which there seems to be a fair amount of agreement about what effect an actual plan implementing the aspirations of the Trump proposal might have.

The Federal Deficit and National Debt

Not much debate here. Mnuchin insisted on Wednesday that the plan would pay for itself by accelerating economic growth, but economists say that’s nonsense -- particularly given that the plan offers little in the way of particulars about “base broadening” -- that is, exposing more individual and business income to taxation, even if rates are lowered.

“Economic evidence is clear that tax cuts don’t pay for themselves,” wrote Chuck Marr of the Center on Budget and Policy Priorities, “and that tax cuts that primarily benefit high-income people and permanently increase deficits — like the Trump plan — can actually hurt growth over time.”

“The absence of base-broadeners means that, taken at face value, it would create large and permanent deficits,” wrote Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office. “Treasury Secretary Mnuchin’s assertion to the contrary is simply a convenient fantasy.”

Related: Time to Think Twice About Those Tax Cuts and the Deficit

The Committee for a Responsible Federal Budget ran the numbers as best they could and concluded the same thing. “Based on what we know so far, the plan could cost $3 to $7 trillion over a decade – our base-case estimate is $5.5 trillion in revenue loss over a decade. Without adequate offsets, tax reform could drive up the federal debt, harming economic growth instead of boosting it.”

Of course, there were dissenting voices, like Chris Edwards of the Cato Foundation, who wrote, “What about the effects of tax reform on the deficit? Policymakers should put that concern aside for the corporate rate cut portion of Trump’s plan because the automatic expansion of the corporate tax base would mean that the government would lose little if any revenue over the long term.”

But Edwards was in a distinct minority.

Distributional Effects

Again, the plan’s lack of specificity is problematic in determining who exactly will benefit from the sort of plan the administration is describing. But there doesn’t seem to be very much disagreement on the general conclusion that it will benefit high earners and people who are already wealthy more than the middle class.

Related: The Basic Problem With Trump's Huge Tax Cut

“Whatever its other virtues, distributional neutrality is not a feature of the plan announced yesterday,” wrote former Clinton Treasury Secretary Larry Summers. “Indeed, between massive corporate rate cutting, big tax cuts for the highest income individual taxpayers, elimination of the estate tax and other incentives, it is a certainty that the vast majority of the benefits of the plan will go to a very small fraction of taxpayers.”

“President Trump’s tax plan announced yesterday is light on details. But what details there are make clear the President’s top priority: costly tax cuts for the wealthy and corporations. For working families, the plan is mostly fuzzy promises,” said CBPP’s Marr.

The plan is “enormously regressive,” wrote William Gale, a senior fellow at the Brookings Institution who served as an economist in the George H.W. Bush White House. “By repealing the alternative minimum tax, the estate tax, ACA taxes on high-income households, and cutting business tax rates by more than half, the proposals are a frontal assault on the most progressive parts of the tax system. The plan would give eye-popping tax cuts to the very wealthiest households (including the President and his family), while giving virtually nothing in comparison to low-income households.”

Related: How Trump’s Tax Cut Plan Would Blow Up the Deficit

Effects on Business

There’s also broad consensus that the plan is extremely generous to U.S. businesses, not least of all because it slashes the corporate tax rate from 35 percent to 15 percent. However, where Trump comes down on some elements of the House Republicans’ plan for tax reform, including the move toward a business consumption tax model that includes a border adjustment tax and immediate expensing of capital investment offset by the elimination of write-offs for business loans, is unclear.

“Cutting the corporate tax rate from 35 percent to 15 percent would have a huge positive effect on the U.S. economy over time,” said Cato’s Edwards. “It would encourage more capital investment and hiring, and it would reduce the incentive for corporations to avoid and evade taxes. Such a rate cut would cause the income tax base to expand automatically and substantially over time.”

Others were more tentative about some of the likely effects, though.

“The steep reduction would, for instance, reduce the incentive for companies to invest overseas and earn profits there rather than here,” wrote AEI’s Pethokoukis. “All else equal, such a rate reduction might modestly boost the economy’s long-term growth potential.”

However, he noted, all else is not equal, and the sharp increase in national debt could put the brakes on that hoped-for growth.

Related: The Best and Worst States for Taxes in 2017

One element of the plan -- the proposal to allow small businesses structured as pass-throughs to benefit from the 15 percent corporate rate -- raised alarm bells across the ideological spectrum.

“The plan would create one of the biggest tax shelters ever,” warned Brookings’ Gale. “By cutting the business rate to 15 percent and setting the top rate on wages at 35 percent, Trump would encourage business owners to cut their own wages and pay themselves in profits instead. Administration officials have promised to prohibit income shifting, but they have not said how, and in reality, it would be extremely difficult to block.”

It’s still early going, of course, and the administration has said that it plans to work closely with members of Congress in the coming weeks. They will find, no doubt, many people from within and without Congress eager to weigh in with fixes, suggestions, demands and more.

The hope is to produce a final, fleshed out plan by summer that might be on the president’s desk before the end of the year. But that timeline is probably even more aspirational than many of the elements in the outline that Cohn and Mnuchin handed out on Wednesday.