Donald Trump has released an outline of his tax plan, and at first glance it would likely be a tremendous boost to economic growth. Note the “likely be,” because a number of the details have yet to be revealed.
The most pro-growth part of his plan is a reduction of the corporate tax rate from the current 35 percent federal rate, the highest in the developed world, to 15 percent for businesses of any size. Trump implies that he wants to eliminate some current corporate tax breaks but isn’t specific. But with a 15 percent rate, those additional tax breaks become far less important to companies.
At 15 percent corporate investment becomes much more attractive because the lower tax rate makes it easier for new investments to be profitable. We could well see investment, and therefore job growth, explode.
Trump’s plan also provides a workable solution to the problem of corporate inversions. Corporate inversions are when U.S. companies switch their headquarters to another country in order to avoid the current corporate rate. At 15 percent, the U.S. would become a magnet for companies around to the world. In other words, companies would be flocking to the U.S. rather than fleeing it.
In addition, Trump addresses the related problem of U.S. companies that make profits overseas. Those companies pay those countries’ corporate income tax rate, but if the companies bring the remainder back to the U.S. they get taxed again at the higher U.S. rate. So many companies leave those profits—estimated at about $2.7 trillion—overseas.
Trump proposes a one-time tax of 10 percent to repatriate those funds, which would swell government coffers and get that capital back in the U.S. Republicans have been trying to get the Obama administration to do something similar, but President Obama is all about punishing companies for leaving money overseas, not helping them return it.
Another positive, if tepid, step: Reducing the top capital gains and dividend tax from 23.8 percent to 20 percent.
With respect to the personal income tax, Trump lowers and reduces the number of rates from seven to four—with the new top rate at 25 percent, down from 39.6 percent. That’s a good step. And he wants to reduce or eliminate the available deductions, especially for higher earners—though he says he will keep the mortgage interest and charity deductions for everyone.
Many conservatives have long championed a low, flat tax—or something close to it—with few or no deductions. Trump doesn’t get us there, but it’s at least a start in the right direction.
Trump boasts that his plan will keep moderate-income workers—up to $50,000 for married filing jointly—from paying any income tax. But the bottom 40 percent of earners, those making less than $47,300, don’t pay any income tax now. So it isn’t clear how much more his plan will actually help them.
Plus, there is a long-running philosophical discussion in which many conservatives argue that everyone should be paying something. Trump’s plan intentionally tries to make the personal income tax more progressive, exempting millions of Americans.
On the unquestionably good side, Trump eliminates the death (estate) tax, the marriage penalty tax and the Alternative Minimum Tax—yahoo!
But as with most of his proposals, a lot of details are missing. His goal is to make higher-income Americans pay a greater share of the income tax burden. The top 20 percent of earners already pay 84 percent of the income tax. How much more progressive can you realistically get?
And here’s an important unanswered question: If one low flat rate is good for business, why isn’t it good for individuals?
While Trump claims that is plan is “paid for”—i.e., new revenues will offset the tax loses—he provides no details. But it is pretty clear that the corporate tax rate cut and the revenues from repatriation of overseas profits would be a huge boost to government coffers. He also claims he will cut federal spending—again, no details—but spending reductions would definitely improve economic growth.
Donald Trump’s campaign has embraced a populist approach, and his tax plan reflects that stance in his move to a more progressive personal income tax. But before he was a populist, Trump was (and is) a businessman, and his corporate tax cut reflects his business acumen.