In Unpacked, Brookings experts provide analysis of Trump administration policies and news.
THE ISSUE: In late April 2017, President Trump released his much anticipated tax plan. Though short on details, the one page proposal raises concerns surrounding its effect on the deficit, corporate taxes, and the well-being of low-income families.
Trump’s tax plan is more of a wish list than an actual set of proposals.
THE THINGS YOU NEED TO KNOW:
- Tax reform is difficult politically because it creates a set of winners and a set of losers, and those losing out tend to be more vocal in their opposition to the reforms than the winners are in their support.
- In economic terms, tax reform is challenging because it’s impossible to know what the effects will be of policies that have never been implemented,
and there is some uncertainty and controversy about the effects of policies that have been implemented.
- The basic goal of any tax system is to raise enough money to fund the government in both the short and long term.
- If the U.S. continues on the path it’s currently on, it will face growing budget deficits and debt.
- Other goals of the tax system should be to spur economic growth as much as possible, and to make the economy as fair as possible. Sometimes those goals seem to conflict, but it is possible to develop policies that are both fair and growth inducing.
- President Trump’s one page, bullet-point tax plan is more of a wish list than an actual set of proposals.
- The plan greatly over simplifies tax reforms. For example, it references subsidizing childcare, but there are probably 150 different ways to do that, and they didn’t specify which one or ones they had in mind.
- There are four major concerns with President Trump’s tax plan:
- First, the plan would dramatically boost the deficit and the public debt, on top of the future increases in debt that are already expected.
- Second, the plan would create an enormous tax shelter. By cutting the business tax rate to 15 percent, and setting up the income tax rate at 35 percent or higher, Americans will have an incentive to convert wage income into business income.
- Third, President Trump’s tax plan would create an international race-to-the-bottom in corporate taxes.
- If the U.S. cuts the corporate tax rate to 15 percent, other countries will respond by cutting their taxes even more.
- Traditionally, when other countries cut their corporate tax rates, they raise value-added taxes in order to make up the revenue.
- The U.S. doesn’t have a value-added tax, so as corporate rates are cut successively around the world, America’s revenue situation would get worse and worse.
- Fourth, President Trump’s tax cuts would be extremely regressive. The plan gives huge tax cuts to the highest income households and very small tax cuts to the lowest income households. That, combined with President Trump’s budget cuts, would make low-income households worse off, while giving substantial gains (hundreds of thousands of dollars per household) to the very richest families in the country.
- Considering these four issues, it’s clear that President Trump’s tax plan is not a true solution to America’s current economic problems.