Yesterday, President Trump outlined his tax plan. Key features:
- Slightly lower personal income tax rates. (Top rate from near-40% to 35%.)
- Eliminating almost all income tax deductions, except mortgage interest and charitable contributions. (No more deduction for your State or property taxes, among other things.) Increase in the “standard deduction”.
- Much lower corporate income tax rates. (Top rate from 35%, one of the world’s highest, to 15%.)
- A one-time tax on overseas business profits. (That haven’t been repatriated to the U.S. Apple has a lot.)
- A “territorial system” where future profits that corporations earn abroad, are not taxed.
- Repealing a bunch of taxes and complications, most notably the Alternative Minimum Tax (AMT) and the estate tax.
Of course, Congress still has to chew on it.
Taking Trump’s proposals by themselves, I have little objection. Rates should be lower. High income taxes are a form of slavery. Corporate income taxes are stupid because they are an indirect, distorted sales tax (that is, a tax paid ultimately by consumers). Estate taxes destroy many small businesses (forcing families to liquidate the business in order to pay the 50% tax or whatever).
Nonetheless, I can’t praise this plan. Because it will reduce revenues at first, without being matched by spending cuts. Our budget will come no closer to balance.
President Obama already doubled the U.S. national debt in his 8 years, from roughly $10 trillion to roughly $20 trillion, for an average real annual deficit around $1.25 trillion. Is Trump going to beat Obama’s record? I sure hope not.
This is an important point. The true level of taxation is the government’s spending level. All spending must be paid for, one way or another. There are 3 possibilities.
- Overt taxes.
- Borrowing. This is a covert tax, a tax on the future (when either the debt must be repudiated, or more and more government revenues must be diverted to servicing it).
- Money-printing. Another hidden tax, this time on the real value (the purchasing power) of everyone’s wages and savings. Also known as “inflation”.
So really, it isn’t a tax cut unless it’s a spending cut also. Trump wants to cut the overt taxes. So, what? Without spending cuts, it’s only a corresponding increase in the hidden taxes: borrowing and/or money-printing.
And what happens when we add (say) a Trump infrastructure spending package and a Syria or North Korea war on top of that? More of the hidden taxes: borrowing and/or money-printing.
I have yet to see any analysis of the impart on small businesses and professionals would file either separate “corporate taxes” or directly file as proprietors, partners or Sub-S corporations. Will we be able to deduct for insurances-paid? Or professional expenses? That’s a huuge expense for many small businesses.
And it will be an expensive hit for those in high state, local or property tax jurisdictions like NJ, NY or PA…
Where is any reform in Capital Gains? Which not only taxes gains but is an inflation-penalty against long-term investment and real estate.
I’ve been giving a lot of thought into getting government out of the supposed ‘charity’ business, where it gives money to nonprofit organizations.
You make a list of those organizations which traditionally receive such tax dollars, but which also would be allowed on your Schedule A as a charitable contribution.
Then, you allow the taxpayer to claim contributions to that organization as a tax credit rather than a tax deduction. At the same time, the amount that they contribute is removed from the money given in tax dollars.
The following year, any nonprofit that received more in direct contributions that the amount granted from tax dollars, the percentage you can claim as a tax-credit is reduced by a percentage, and the balance can still be claimed as a deduction.
It becomes much easier at that point to get government out of the charity business.
Ted, the obvious answer to the Capital Gains Tax is to simply index the basis to inflation, then tax at the marginal rate. Why they don’t do that, I have no idea.
Unindexed long-term capital gains is a secret, covert Federal tax-levy on personal property via inflation.
A few years ago I sold an asset I had owned since the Carter Administration. Even though in constant-dollars I sold it for almost half what I paid for it, in current dollars I “made” a taxable capital gain of over 200%. So despite the major loss in real-value, I had a hefty tax-bill for the “gain”.
Which is why it’s being framed as “Trump is sticking it to the Blue States”. While I have no issue with that in theory, as it tends to showcase the actual amount of taxes paid rather than masking or ‘softening the blow’ by giving a credit on the federal return, it does make it a harder pill to swallow for the Rust Belt states which also happen to be largely Blue (and subject to high state & local taxes).
As far as the state tax deduction goes… I agree with the philosophy of “why should the other federal tax payers subsidize out of control spending states like CA”?
I live in a blue state with an R governor an R legislature. Go figure.. Anyway, the governor has done a great job at keeping a lid on spending. It helps that our state can’t borrow money to fix a budget issue. This federal deduction needs to go away.
I guess that the unstated truth is that tax cuts are far easier pass than cutting out waste, programs, and fat.
If and when the tax cuts are enacted, we can concentrate on government spending being brought under control and useless stuff scrapped. As every overweight person knows, you can’t just crap it off, you have to pare it down a quarter of a pound at a time.
While favoring lower spending and lower taxes, I’ve come around to the view that as long as We The People vote for pols that promise goodies (and become hostile when anyone mention cuts: see what happens when anyone talks about SS cuts decades hence), we need to pay for it – up front.
Here in Kansas, the GOP decided to boost business using supply-side cuts for business. While I subscribe to the idea that tax-cuts can boost business and tax revenue, there’s a point at which this ceases to be true.
Business owners took advantage of the breaks to keep more money (naturally) with no improvements in employment.
KS now has to figure out how to cover big budget deficits and its under-funded public pensions (which should be banned). We know how well that’s working out for IL, CA, NJ, etc.
I’ve lived in several states and I never thought KS was overtaxed given our excellent roads, parks, etc. And there was a time when KS ranked near the top of “best-managed states”.
The majority of people pay no meaningful amount of tax so tax cuts for business won’t garner much public support (right or wrong). Additionally, the wealth gap is real and cries of “tax cuts for the rich” will find a lot of willing listeners.
I think cutting the corporate rate is fine but this should be accompanied by cuts in corporate welfare – can’t have one without the other.
@7: Helio, the problem with that is that we wind up with tax cuts but, somehow, never get round to the spending side.
Remember how the Dems stiffed Reagan on promised spending cuts and then blamed him for increasing deficits (which were pocket change compared to deficits under GWB and BHO)?
That’s true of every state [AFAIK], and highlights why there are pockets where some states are doing well and others are hurting when the national economy is either “good” or “in the tank” at any given time. But part of the problem is that when states are hurting, they tend to run to their (allegedly) rich, single, Uncle in order to ‘borrow’ a few bucks until payday. Of course when payday actually comes, they up the spending again.
One of the budget proposals I like is the elimination of the Community Development Block Grant. Though it will probably worm its way into the final budget yet again, in many respects it has become a slush fund that state—and particularly local governments—use for goodies that they are unwilling to ask residents to pay for. That’s great for states & locals, but horrible for an ever expanding federal budget.
As much as I like having the GOP control the executive and legislative branches, we still have a very divided government. Who among Democratic Party senators will allow substantial, deficit-addressing cuts when for many, a re-election is as soon as 2018? This isn’t really about Trump.
As much as I would like to see a spending cut or even freeze, I don’t think it’s going to happen. There is no national consensus on what government should be doing. (Try telling someone in SELA that levees and flood control are a local issue.) The good thing about lowering tax rates is it should help grow the economy . (I think it’s going to be faster than anyone thinks) This will increase revenue to the government.
Oilman.. you are correct.. revenues will increase.. and for every new dollar raised, 3 will be spent.
I would favor a top tax rate of around 33% for people and 25% for corporations. The largest problem though is spending. Trump won’t do anything about entitlements because he won’t rock the boat. But we will deal with Medicare, Medicaid, and Social Security about five years down the road when they are ready to go broke. Martin Feldstein had a great idea about raising the retirement age to 70 eventually. With long life expectancy, this is overdue. And also raise Medicare to 68 for future retirees.