When Donald Trump first revealed his tax plan, I saw two immediate responses from the Twitterverse: (a) The Trump tax plan is designed to tax the rich, and (b) the Trump tax plan is the typical right wing trickle down economics.
(Sidebar: NOBODY is advocating trickle down economics, but that’s neither here nor there)
Since this is Donald Trump, and my interest in the man begins and ends with how long it’ll take for him to get booed off the stage, I mostly ignored the announcement. But I had a friend ask me about it on Facebook, and I have a hard time saying no to open tax questions.
There’s certainly worse things to have a hard time saying ‘no’ to. Just ask First Man Hopeful Bill Clinton.
The Donald Trump Tax Plan, in a nutshell, lowers taxes at all points, both for businesses and individuals. The one exception to this is that people making between $150k and $460k will have to pay capital gains taxes at the same rates as those who currently make over $460k, not including the Obamacare surtax (whether or not the surtax will remain is unclear).
Let’s start with that single tax increase. Donald Trump threw it in because he claimed only a few days previous that he thought hedge fund managers should pay more taxes. When he unveiled his tax plan, he harped on that one small tax increase (only 5%), boldly declaring that he was hammering those rich SOBs. His sleight of hand fooled a number of reporters (not a hard task, from what I’ve seen), and many ran out and claimed Donald Trump was taking on the rich (hence Twitterverse response (a) above).
Of course, there’s also the yuuuge (sorry, I had to) issue that capital gains taxes don’t hit hedge fund managers anymore than anyone else, since most of their income is at ordinary rates. It’s a common misconception, though, and considering Donald Trump has all the political knowledge of a skilled platypus, it’s not too surprising that The Donald fell for it.
For those of you keeping score at home, capital rate taxes would hit private equity fund managers, not hedge fund managers.
The Big Problem
Ultimately where the Donald Trump Tax Plan falls through is not in how much the rich are or aren’t paying. It’s that nobody’s paying.
These are tax cuts across the board. Tax cuts can certainly be good for an economy if done right, but this is not done right. It’s just a hatchet job, slashing numbers and adding a sophomoric “I Win” to the returns of those who owe no taxes.
Generally speaking, there’s two ways to measure the impact of tax plans. The first is Static, which doesn’t account for the economic impact the tax plan will have. This is a much simpler way to analyze a plan, but it’s clearly flawed, since taxes affect behavior and any plan will clearly have some effect on the economy. The other method is the Dynamic method, which takes into account the economic effect. Although it is a much better way to measure a plan, it throws in a lot of assumptions and a lot of human error.
If Donald Trump is actually going for something intelligent here (and I’m still not convinced), he’s aiming for the dynamic scorecard approach. The argument here is that increased economic output will offset the decrease to government revenue. It’s a core tenant to all serious tax reform.
At a glance, Trump’s tax plan makes huge cuts to taxes, so it should be a boon for the economy. This is exactly the conclusion The Tax Foundation reaches in their analysis, predicting a significant 11.5% increase in GDP in the long run. Those numbers are amazingly better than the measly single digit growth we’ve been seeing this past past decade.
Great, right? So what’s it gonna cost us?
Well, there’s the rub. On a static basis, Donald Trump’s tax plan will increase the deficit by $11.98 TRILLION over the next decade. Considering how many people are freaking out over our current $18 trillion national debt, this tax proposal skips right over ludicrous and goes full plaid.
If we look at it on the dynamic model, The Tax Foundation calculates it’ll only cost $10.2 trillion.
Oh, I’ve had this conversation before! If something’s way out of your price range, it doesn’t matter if you can pick it up at a 15% discount.
And here’s the thing about debt. It doesn’t magically go away.
Even if we have a decade or two of unprecedented growth, eventually comes The Reckoning. That debt will have to be paid back, which means we’ll have to enact huge tax increases, huge government cuts, declare bankruptcy, or some combination of those three. Any of those at the amounts needed would almost certainly wipe out any of Donald Trump’s economic growth.
Of course Donald Trump would be out of office by then, which means Donald Trump doesn’t care.
Look, there are other problems with the tax proposal, including a failure to address international taxation in any meaningful sense and skipping over a number of other significant tax problems, but those are nothing compared to the kind of price tag we’re talking about.
If Donald Trump would like to propose which government programs he plans to pare back to cover the 10+ trillion dollar deficit (not to mention cover the current debt bomb we already have), I’m all ears. Then we can talk about those relatively minor tax issues he hasn’t addressed. As it is now, his plan sounds like a painful attempt to pander and buy votes.
For someone whose political image is that he “tells it like it is,” that’s a yuuuge problem.