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 is repudiated, or more and more government revenues must be diverted to debt-servicing costs).
- 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 (also) a spending cut. Trump wants to cut overt taxes. So, what? Without spending cuts, it’s only an 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 war on top of that? More of the hidden taxes: borrowing and/or money-printing.