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Trump Tax Plan Looks Good, But Hold the Celebration

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Yesterday, the Trump administration rolled out its tax reform plan, or more like an outline for the plan. While it contained a lot of red meat for supporters and plenty of things to like, it lacked some important specifics and faces an uphill battle in Congress.

Generally speaking, those who favor lower taxes and a simpler tax code will find a lot of positives in the plan. It would drastically slash corporate and business taxes, lower the highest individual rate,  double the standard deduction, eliminate several brackets, and repeal both the alternative minimum tax and the inheritance tax. The plan also calls for eliminating most deductions.

Treasury Secretary Steven Mnuchin characterized the plan as “the biggest tax cut and the largest tax reform in the history of this country.”

The reduction in the corporate/business rate is the most dramatic proposal, which would slash the rate from 35% to 15%. The US currently has the highest corporate rate of any industrialized nation, and is the most “complicated and uncompetitive business rate in the world,” Mnuchin stated. The United Kingdom, Germany, Canada, and Ireland all have rates below 20%.

Most individuals would also likely pay lower taxes under the Trump plan. The current tax code includes seven brackets – 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The new proposal would be reduced them to just three – 10%, 25%, and 35%. With the doubling of the standard deduction, a married couple would pay no taxes on the first $24,000 they earn.

All of this sounds great. But the one-page blueprint lacked specificity. For instance, we have no idea how much income each individual rate would apply to. And as the Los Angeles Times pointed out,  the plan doesn’t address “the biggest problems with the tax code — including the multiple categories of income and the byzantine rules for calculating what portion of that money is taxable.”

But there is an even more fundamental issue with the tax plan that we need to grapple with. Absent spending cuts, it will certainly accelerate the upward spiral of federal debt. Initial analysis by the Committee for a Responsible budget estimated that the plan could reduce federal revenue by as much as $7 trillion over 10 years.

“Based on what we know so far, the plan could cost $3 to $7 trillion over a decade– our base-case estimate is $5.5 trillion in revenue loss over a decade. Without adequate offsets, tax reform could drive up the federal debt, harming economic growth instead of boosting it.”

Cutting federal revenue would be great if the government actually cut spending and shrank accordingly. But we all know that won’t happen. In fact, the Trump administration has proposed massive spending on infrastructure.

Let’s be realistic – the government isn’t going to shrink, and Congress won’t actually cut spending. That means the tax plan will pile on trillions of dollars in new debt on top of the mountain already looming over us. A recent Congressional Budget Office Report already called the current US fiscal path a fiscal road to hell. If the US government maintains current policies and economic trends continue, the debt will likely double over the next 30 years, rising to about 150% of GDP. The Trump tax plan, absent serious budget reform, will simply smash down on the accelerator.

While aggressive tax reform will help individuals in the short-run, failure to address the unsustainable fiscal path the government is currently racing down could ultimately crash the entire economy.

Taken simply on its merits, the Trump tax plan looks pretty good. It would lower the tax burden on most Americans and US companies. That’s a good thing. But one has to wonder how long it will take for the plan to run into political realities. Trump hasn’t exactly inspired great faith in his ability to navigate political waters and get things done. What kind of plan will Congress actually introduce? Will this end up turning into another Obamacare repeal disaster?

There are already some signs of troubled waters. CNN reports behind the scenes grumbling going on among Republicans on Capitol Hill.

“Despite a positive public front, congressional Republicans are quietly voicing frustration that President Donald Trump’s big tax announcement Wednesday emanated from a disjointed process — and lacked crucial components necessary in the push to secure the first major tax reform in more than 30 years.”

Republican congressional leaders including Speaker of the House Paul Ryan, Senate Majority Leader Mitch McConnell, House Ways and Means Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch issued a tepid joint statement.

“The principles outlined by the Trump Administration today will serve as critical guideposts for Congress and the administration as we work together to overhaul the American tax system and ensure middle-class families and job creators are better positioned for the 21st-century economy.”

One unnamed GOP aide quoted by CNN was more blunt about the Trump proposal. “It’s not tax reform. Not even close.”

All of this would seem to indicate the actual tax reform plan rolled out in Congress probably won’t look a whole lot like the Trump plan when it’s all said and done. We can be happy about elements of the proposal, but we shouldn’t expect that’s what we’ll get.

So, while there are certainly reasons to feel optimistic about Trump tax reform, you should probably keep the cork in the champagne bottle for the time being.



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