» Trump Tax Plan: A Very Bad Plan, With a Few Good Elements Decision Economics

Trump Tax Plan: A Very Bad Plan, With a Few Good Elements

Posted December 20, 2017 by rvillareal

The Republican tax plan will cross the finish line this week, providing both Congress and the White House with a major victory.  This is a very bad bill with a few good elements, such as the drop in the corporate tax rate to 21%, the expensing of equipment, and some loophole closings.

But the bill is a failure on a number of levels:

  • further stimulus is not really needed and may prove inflationary with the unemployment rate already so low
  • the bill costs at least $1.5 trillion over 10 years, adding to the debt burden and potentially lifting rates
  • the bill makes corporate tax changes permanent but individual tax changes sunset in 2025, creating another (smaller) fiscal cliff,
  • promotes inequality and reduces social cohesion, with the largest tax cuts going to the very rich.

This may be the first step in a “reverse Robin Hood policy” in which the GOP eventually pays for the tax cuts and future debt reduction with cuts in social spending that mainly help the lower and middle-income classes.

A key details about the plan, which remains quite close to the initial frameworks of the Congressional GOP and the Trump campaign:

  • The $1.5 trillion net cost of the tax plan, includes $3.9 trillion revenue decreases and $2.3 trillion of revenue increases.  So, there are a lot of winners and losers.
  • If pass-through income is counted as corporate income, corporations receive about 40% of the net benefit from the bill.
  • The top personal tax rate would be cut to 37% (until 2025) and the corporate tax slashed to 21% permanently.
  • While it is hard to tell, it appears that a 30% marginal tax rate will apply to pass-through income (until 2025), driving a wedge between the treatment of “wage” and “almost” wage income like pass-through income.
  • The potential for the well-to-do to switch from being taxed as individuals at 37% to 30% as pass-throughs or even 21% as corporations will be enormous and very costly to the Treasury.
  • The standard deduction would be doubled until 2025.
  • The AMT would be increased until 2025.
  • The estate tax exemption would be doubled until 2025.
  • Most deductions were eliminated but the mortgage deduction capped at $750K combined mortgages and SALT taxes at $10K.  The child care deduction is expanded.
  • While a number of corporate tax breaks are curtailed or eliminated, many new ones are created.  A particular favorite is a lower excise tax for craft beer producers.  Sophisticated drinkers rejoice!
  • The treatment of international business income became even more complicated, with varying rates and some repatriation incentives.  The changes may run afoul of EU rules and provoke a redrafting of certain provisions.
  • There would be full investment expensing for equipment, with a phase-out beginning in 2023.  The cost would be paid for in part with partial instead of full interest deductibility.

What will happen in 2018 and beyond:

A tax corrections bill is coming in 2018 and needs 60 votes in the Senate.  A bill this complex and hastily drawn will need to be cleaned-up.  But this time, 60 votes will be need in the Senate for passage.  Democrats plan to act the way the Republicans did when Obamacare needed to be cleaned-up.  One fight was taken to the Supreme Court.

The international provisions made need to be rewritten in 2018.  The EU has already indicated that the international provisions run afoul of their trade laws.  This needs to be fixed or the US faces some form of retaliation.

Implications for 2018 Congressional elections might not be “that bad” unless budget cuts follow.  The two-thirds of tax filers do not itemize and most will receive a modest tax cut.  If wage gains accelerate as we think, workers will be better off and won’t care where it came from.  So, the economy favors the GOP, unless they hammer away at paying for the tax cut and reducing the debt by cutting social programs that mainly benefit the lower and middle classes.  While Congressional leadership has promised that these cuts will not kick in 2018, just talking about future reductions before November is a potential political liability.

A small fiscal cliff is coming in 2025, plan now!  To keep the cost of the tax plan below the $1.5 trillion laid out in the Congressional budget, Congress had to make many individual tax changes (as well as expensing) sunset at the end of 2025.  The fiscal cliff of between 0,5 and 1 percent of GDP will unfold in 2026.  Sound familiar?

 

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