Donald Trump Delivers Center-Right Populist Tax Plan

Sometimes presidential candidate Donald Trump seems to be winging it, but other times he acts with clockwork timing and political precision. The unveiling of his tax plan comes at exactly the right moment, when he needed to deliver something substantive.

Its contents are a mixture of center-right reforms and populist juice that will probably go over very well with a broad swath of the American electorate, although economists of both Left and Right will take issue with his proposals, for widely divergent reasons.

Trump’s unveiling of the tax plan was a tremendous performance. Part of the secret to his success is that he sounds like what many people imagine they would sound like, given a megaphone to shout their discontent into the faces of the U.S. political establishment. That’s why Trump’s popularity doesn’t seem to take much of a hit when he gets rough with likable competitors, such as Senator Marco Rubio, who he dismissed as something akin to a hapless child during his press conference.

When Trump talks about the current tax-and-spend system as an exercise in needless complexity and irresponsible folly, he has a large, receptive audience. When he cracks wise about how Russian president Vladimir Putin gets softer treatment from interviewers because he’s a nicer person than Trump is, he simultaneously polishes his tough-guy credentials and wins points for self-deprecating humor.

It’s a bit of a tightrope act, really – instead of appealing to a big, disaffected audience sprawled across both center-Left and center-Right, he runs the risk of annoying everyone and watching his support disappear. It hasn’t happened yet, despite numerous confident predictions to the contrary from analysts who thought they knew where all the high-voltage third rails of American politics were located.

Trump’s delivery in his Monday press conference was perfectly in sync with the mood of his tax-reform document, which can be read here. Allow me to quote verbatim from the first of the plan’s listed goals:

If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.

You don’t see a lot of policy white papers that talk about taxpayers sending one-page forms to the IRS that say “I win.” It’s lovably cheeky, but this is a purely populist measure, not a conservative reform. Paying zero income tax, while consuming government benefits, is not a “victory” over the IRS, government, or the Americans who are paying for all that stuff.

One of the long-standing conservative complaints against the “progressive” tax system – which Trump himself has been known to criticize from time to time – is that it leaves too many people with “no skin in the game.” They pay nothing, so they can see no reason to resist eternally rising taxes on those who do pay, and the madcap spending financed by those taxes.

Trump envisions taking nearly half of current filers off the income tax rolls, which would be a lot of skin no longer in the game:

The Trump plan eliminates the income tax for over 73 million households. 42 million households that currently file complex forms to determine they don’t owe any income taxes will now file a one page form saving them time, stress, uncertainty and an average of $110 in preparation costs. Over 31 million households get the same simplification and keep on average nearly $1,000 of their hard-earned money.

Of course, the offer to pay zero tax will sound great to those who believe they will qualify for the 0 percent rate, so it could be seen as a dose of populist sugar to help Trump sell the rest of his reform proposals, some of which will sound very good to conservatives. He wants to eliminate the hellish Alternative Minimum Tax, for example – a tax trap originally proposed as an exotic rate that would affect only a few of the very wealthiest Americans, but now it hits a sizable chunk of the middle class. If Trump holds up the corpse of the AMT as an example of how “progressive” social-engineering tax proposals always end up affecting far more people than promised, he could perform a valuable educational service.

If I were advising Trump, I would tell him to defend his zero percent tax rate by claiming America would prosper so much under his proposals that hardly anyone would be making a measly $25k per year. He could also usefully point out that even the most dramatic tax reform proposals, such as the Flat Tax and Fair Tax, have some sort of exemption that effectively knocks low income earners off the bottom of the tax rolls – an income exemption for the Flat Tax, sales-tax breaks for necessities under the Fair Tax.

Also, he could score a few points with grassroots conservatives by pointing out that the greatly diminished Internal Revenue Service necessary to administer such a tax program would have fewer powers that could be corrupted to political ends. He’ll have to address how tax exemptions for political organizations will work, but “no more Lois Lerners” would be a useful rallying cry.

Trump’s plan also knocks out the “death tax” – it’s referred to by those very words in the plan. “You earned and saved that money for your family, not the government. You paid taxes on it when you earned it,” the plan declares. Later, Trump flatly declares, “The death tax punishes families for achieving the American dream. Therefore, the Trump plan eliminates the death tax.”

Now that’s how you sell a conservative proposal with populist techniques. Watching Trump argue this point with Democrats would be enormously entertaining. I’ll bet he’s portraying them as ghouls who dig up dead bodies to shake the corpses down for pocket change by the time he’s done.

The simplification aspect of Trump’s plan comes from boiling the current seven rates down to four: zero percent up to $25,000, 10 percent up to $50k, 20 percent up to $150k, and 25 percent beyond that. He also lets single filers who make less than $50k pay zero percent on capital gains and dividends, to encourage small investors. There are no penalties for married filers, and a bump of roughly 50 percent for heads of household (so the zero percent rate extends to $37.500 instead of $50,000 for them, for example.) Trump was very proud of eliminating the marriage penalties built into the tax code in his press conference.

Four rates isn’t quite the Flat Tax or two-step modified Flat Tax some reformers hoped for, but it’s still flat-ish, because Trump also wants to knock out almost every exemption and deduction, except for those related to mortgage interest and charitable donations, for the top tier. The plan promises that those who pay the 10 percent rate will keep “all or most of their current deductions,” while the 20 percent rate gets to keep “more than half of their current deductions.”  For those who give up deductions, Trump promises the compensation of “the lowest tax rates since before World War II.”

This might seem a bit counterproductive from the simplicity standpoint, because a large portion of the tax base gets to keep most of the current, complex deductions, but no doubt Trump would argue that people who make less than $150k per year weren’t foraging through the tax code for a lot of nitpicky little deductions anyway. It will be interesting to hear more about which deductions he plans to eliminate for the lower brackets. The money saved on tax compliance costs would be considerable, and if he’s lowering rates across the board, the amount of economically unproductive effort invested in sheltering income from high rates should be reduced.

Trump makes a very big deal about his business tax reforms.

No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world.

He talked quite a bit about “corporate inversions” in his press conference – that’s when American companies merge with overseas interests and shift their money out of the United States to avoid its insane tax system. Trump plans to hit inverted companies with a one-time discounted tax rate of 10 percent, to help finance his other tax cuts, then “end the deferral of taxes on corporate income earned abroad.” He’s very confident that his lower, simpler business tax rates will make corporations voluntarily refrain from inversion, making the U.S. a desirable location for global incorporation, rather than a socialist tax dungeon smart executives escape from at the first opportunity.

One point businessmen will want clarification on is Trump’s promise to “phase in a reasonable cap on the deductibility of business interest expenses.” Reasonable is an adjective. Numbers are facts. Trump will want to provide his caps and timetable soon, if he wishes to line up happy CEOs to support his reform plan.

He’ll also have to nail down which “tax loopholes” he’s planning to eliminate. Trump should bear in mind that conservatives are long accustomed to hearing liberals portray every single feature of the tax code they dislike as a “loophole.” It’s an ideologically loaded term.

Big picture: a lot of individual filers will love Trump’s promises to take them off the tax rolls, or reduce and simplify their taxes. (He’ll have to address the business of tax refunds, tax credits, and the unhealthy practice of using the IRS to hand out welfare checks in more detail. He will be attacked from the Left, if he’s going to eliminate “tax refund checks” for people who don’t actually pay taxes.)

He also scores populist points by going after groups currently perceived by the public as raking in a lot of dough without paying their “fair share,” notably the “hedge fund guys,” who once again came in for a beating in Trump’s press conference. He talked about how his own taxes will go up under the plan – an argument against interest that rarely fails to win credit for wealthy people who urge tax increases.

He’s using this populist idea to fuel a supply-side conservative engine, designed to solve fiscal problems through explosive economic growth.  He’s saying that with corporate rates cut and simplified, investment will flow and jobs will blossom, solving various social ills and providing enough revenue to sustain the government with a modest, simple tax system.

The missing piece of this puzzle is what Trump plans to do about government spending.

He disparaged Big Government for wasting huge amounts of money on foolish things in his press conference, but “I will stop spending billions on stupid crap” is not the detailed policy proposal he needs to put on the table. Hopefully he understands that every nickel of the money spent on stupid crap is defended by a constituency ready to fight like wildcats to keep it. The Left has always been convinced that the desire for fiscal responsibility is vague and diffuse, compared to the sharp and intense desire of government dependents – some of which are very wealthy and well-connected – to keep their money coming.

Reforming tax collection solves less than half of our looming government fiscal crisis. If Trump’s tax proposal wins him populist support from across the ideological divide, it will be interesting to see if he can leverage that support behind far more painful plans to cut spending. If he does, he’ll be effectively convincing a lot of people that working in a low-tax, low-spending economy is preferable to living on the dole.

Would that achievement counter the societal damage of taking another 40 million households out of the taxpaying game?

Also, as conservatives digest Trump’s plans and find some of these proposals a bit harder to swallow than others, let’s look a bit further down the road and ask: would Trump’s vision of tax reform set the stage for even more conservative reforms under his successors – perhaps even establishing the bridge to a true Flat Tax or comparably dramatic perform – or would he be setting up a system progressives could corrupt even further, now that so many low-income people had been taken off the tax rolls entirely? If Trump is right about the economic prosperity and overseas investment encouraged by his business tax proposals, might the Left find people unwilling to jeopardize those gains and return to Obama-style malaise?


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