Trump tax plan: A little growth, a bigger deficit
Washington — President Donald Trump’s team boasted Wednesday that its tax-cut plan would light Americans’ financial burdens, ignite economic growth and vastly simplify tax filing.
Yet the proposal so far remains short of vital details, including how it would be paid for. And based on the few specifics spelled out so far, most experts suggest that it would add little to growth while swelling the budget deficit and potentially handing large windfalls to wealthier taxpayers.
Trump’s plan would replace the current seven income tax brackets with three, and the top bracket would drop from 39.6 percent to 35 percent. It would also slash the corporate rate from 35 percent all the way to 15 percent, a boon to most companies even though many don’t pay the full tax now. With tax credits and other loopholes, most corporations pay closer to 20 percent, according to calculations by JPMorgan.
Perhaps the most contentious plank would enable taxpayers with business income — including those wealthy enough to pay the top tax rate — to instead pay the new 15 percent corporate rate. That’s because Trump would apply the corporate rate to “pass through” businesses. Pass-throughs include partnerships such as law firms and hedge funds as well as most small businesses — from the local florist to the family-owned restaurant on Main Street.
What’s more, some privately held large companies — including Trump’s own real estate empire — are structured as pass-throughs and would benefit, too.
Here’s a closer look at Trump’s proposal and its likely impact:
It’s hard to say precisely because the administration has released so few details. The three new income tax rates would be 10 percent, 25 percent and 35 percent.
But Trump’s top economic adviser, Gary Cohn, and Treasury Secretary Steven Mnuchin, weren’t ready to say at what income levels these new rates would kick in.
Cohn said the plan would cut taxes “especially for low and middle income families.” Yet Trump’s campaign proposals were skewed to the wealthiest Americans, and it’s likely that his new proposal, once fleshed out, could be as well.
Trump wants to eliminate the estate tax and the alternative minimum tax, thereby benefiting many of the richest taxpayers.
Why cut corporate taxes?
By making corporations more profitable, the Trump administration hopes to encourage more business spending on equipment — from computers to factories and machinery.
Doing so, in turn, could make the economy more efficient and accelerate growth and hiring. Growth has been stuck at about 2 percent a year since the recession ended in 2009. Mnuchin says the administration wants to accelerate it above 3 percent, a pace it hasn’t touched since 2005.
The corporate tax cuts are also intended to encourage more businesses to stay in the United States, which now has the highest corporate rate among the advanced economies. The Obama administration had proposed cutting it to 28 percent.
What about the deficit, growth?
The government’s budget deficit could explode under the plan, offsetting many of the benefits for the economy, experts say. The Committee for a Responsible Federal Budget’s rough estimate puts the loss of revenue at $5.5 trillion.
Mnuchin argued that the tax cuts would spur faster economic growth, which, in turn, would produce more tax revenue. And the elimination of tax deductions and other loopholes would raise revenue as well, he contended.
But the Trump team offered no details on which deductions would be dropped — a move that would likely spark ferocious opposition from the beneficiaries of those deductions. And most economists don’t accept the notion that growth would accelerate enough to offset the lost revenue.