Home > Uncategorized > The Republicans’ tax plan will impede growth

The Republicans’ tax plan will impede growth

from Dean Baker

Surprising no one, the Republicans outlined a tax plan that could mean huge tax cuts for the very rich with little or no tax reductions for the bulk of lower and middle income taxpayers. However in spite of their claimed “pro-growth” agenda, the plan included several provisions that will likely be a boon to the tax shelter industry and therefore an impediment to growth.

The giveaways in the tax plan include the elimination of the estate tax, a great benefit to the tiny portion of the population that will have more than $10 million to pass on to their children. The plan also calls for the elimination of the alternative minimum tax (AMT). This is a provision that only affects high end taxpayers. It ensures that they pay a minimal level of tax even if they have managed to effectively used loopholes to limit their tax liability. Donald Trump was subject to AMT in the one tax return which was disclosed in part.

And the tax plan lowers the top marginal tax rate from 39.6 percent to 35 percent. For a Wall Street trader type earning $2 million a year, this can mean savings of more than $50,000 a year.

We can’t know yet what the rest of us will get since they haven’t bothered to figure out where the bracket cutoffs will be. We do know is it not likely to be much.

The Republicans have touted their plan to double the standard deduction for a single individual from $6,350 to $12,700. While that sounds really generous, they are also eliminating the personal exemption of $4,050. This means that under their plan, the first $12,700 of income would be untaxed, compared to $10,400 now. 

But before you spend your tax savings, you have to realize that they want to raise the bottom tax rate from 10 percent to 12 percent. Suppose you earn $40,000 a year. Under the current system you would pay a tax rate of 10 percent on $29,600 in income ($40,000 minus $10,400), or $2,960 in taxes. Under the Republican plan you would pay 12 percent on $27,300 ($40,000 minus $12,700) or $3,276 in taxes.

At lower incomes the arithmetic comes out a bit better. For example, someone earning $30,000 a year would save$116 in taxes, but from what we have seen, those at the middle and bottom are not going to be big gainers from this tax plan.

One implication of raising the standard deduction is that many fewer people will itemize their deductions as an alternative to taking the standard deduction. While this does simplify the tax code, it largely destroys the supposed purpose of the mortgage interest tax deduction.  This deduction is supposed to provide an incentive for home ownership, but under this plan the only people taking the deduction will likely be higher income people who would have been homeowners with or without the deduction.

But moving away from the winners and losers aspects of the tax plan, there are also the anti-growth portions to consider. At the top of the list is the proposal to have a maximum tax rate of 25 percent on income from pass-through businesses.

This is often wrongly referred to as a cut in the tax on businesses. It isn’t, these businesses already pay zero tax; that is what it means to have a “pass-through” business. Only the business owner pays tax on the income she receives from her business, the business itself pays no tax.

This proposal would create a special lower tax rate for income received from a business as opposed to income from working. Not only is this unfair, it is also an invitation for tax gaming. Higher earning people who would be subject to a 35 percent tax on their other income will find ways to have their income appear as business income, which would reduce their tax rate by 10 percentage points to 25 percent.

This should create plenty of jobs in the tax gaming industry, but it will pull resources away from the productive economy.  In short, it’s great policy if the point is to slow growth.

The other big invitation to gaming in this plan is the switch to a territorial tax. As it stands, a multinational company like Apple can defer its taxes on overseas profits as long as the profits stay overseas. This has led to plenty of gaming, as companies have incentive to show more profit in tax havens like Ireland and keep the money their indefinitely.

The Republican plan removes the issue of companies squirreling money overseas, but gives them even more incentive to have their profits show up in tax havens like Ireland. Instead of deferring taxes on foreign profits until they are repatriated, it eliminates the tax on foreign profits altogether. The tax gamers will make lots of money helping companies find ways to have their US profits appear as overseas profits.

The Republicans insist the I.R.S. will limit this gaming, but it’s difficult to see how. The I.R.S. has very limited enforcement resources, largely due to cutbacks pushed by Republicans. By contrast, the pockets of corporate America are virtually bottomless. There is every reason to believe that in Donald Trump’s America, the rich and corporations will have little trouble gaming the tax code.

While we have to wait to see the full plan, the sectors that are almost certain to be big winners are the accounting industry and tax lawyers. That’s not good for growth, but will make the rich even richer.

See article on original site

  1. October 7, 2017 at 11:09 am

    While we have to wait to see the full plan, the sectors that are almost certain to be big winners are the accounting industry and tax lawyers. That’s not good for growth, but will make the rich even richer.

    The definition of the modern Republican Party: making the rich ever richer; destroying public goods government and regulation; ensuring full employment for accountants, lawyers, and economists. The solution: confiscate all money in private hands while writing a tax redistribution plan to spread it around to all Americans.

  2. October 15, 2017 at 1:00 am

    Trump’s budget is sadism, greed, and chaos.  Chaos is what happens when universities unsure of their budgets delay their October funding.  Demonizing regulations is irrational, like trusting in wishful thinking and magic thinking instead of facts and science.

    Donald Trump’s Dangerously Coherent Agenda by John Nichols, rosalux-nyc.org, Oct 2017, 28 pp http://www.rosalux-nyc.org/wp-content/files_mf/web_nichols_trumpagendaengfinal.pdf

    • October 22, 2017 at 5:33 am

      Nichols’ points are all valid. And all scary. But he misses one thing. Trump remains non-ideological, but he is a greedy and vindictive sociopath. Which fits quite well with present day “conservatism.” We see this in Trump’s embrace of austerity, both economic and personal for his inferiors and his eager willingness to destroy anyone’s life if it enriches him. Trump serves his own class, the super-rich. And the little trust he has for other humans is restricted to members of this class. What would add to this very frightening situation is if Trump learns to fake empathy. Then most of his victims won’t even see him coming.

  3. October 22, 2017 at 1:05 pm

    I find this whole discussion disgusting, since crucially we do not need growth: we need an increase in efficiency in selecting what to produce, and rational restraint of consumption to what we need rather than what we want, so that our demands on the Earth’s ecological and environmental systems can get back to within the limits of its powers of self-healing.

    On bringing Trump into the argument, let us not forget that the historical evidence shows he and his are little different from ruling elites down the ages. John Buchan in “Julius Caesar” described the Romans as “farming” their subjects. In the still not repudiated terms of Social Darwinianism, elites see themselves as Supermen, so farm mere Humans as if they were animals. This is not a scientific issue, it is a psychological and philosophical one of superficial thinkers choosing to deny reality to a past and future they can’t see, thereby denying the possibility of there being a Father god to thank for the existence of everything, and in Catholic Christianity a wholesome Family model of coexistence with and care for of all the rest of Creation, not merely a Chosen Race already privileged by being exceptionally gifted.

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