In an op-ed in today’s Wall Street Journal, presidential candidate Donald J. Trump outlined some of the major benefits of his tax plan. In particular, the plan has some substantial rate reductions for all Americans. It also includes some revenue-raising provisions, such as taxing carried interest at ordinary income rates.
I describe the plan in detail in the analysis posted here. By my estimates, Mr. Trump’s plan, under the assumption that aggregate production and incomes don’t change as a result of the plan, reduces revenues to the treasury by $11.98 trillion. Allowing for the increased incentives to work and invest (and therefore, higher aggregate economic production) our Taxes and Growth model estimates the plan to reduce revenues by $10.20 trillion instead.
As you can imagine, then, I was puzzled by this statement in Mr. Trump’s piece: “With moderate growth, this plan will be revenue-neutral.”
I do not believe this to be true under any scenario remotely resembling Mr. Trump’s plan.
Mr. Trump is a popular candidate, and $11.98 trillion is a very large number, so I believe I owe my readers a longer explanation than I would give otherwise. To that end, a table of rates under current law and under the Trump plan may be illustrative in showing where I’m coming from.
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Rates Under Current Law and Under Donald Trump’s Tax Plan |
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Current Law |
Trump Plan |
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Top Marginal Individual Rate |
39.6% |
25% |
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Marginal Income Tax Rate for a Couple Earning $45,000 |
10% to 15% |
0% |
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35% |
15% |
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Top Marginal Rate on Pass-Through Businesses |
39.6% |
15% |
All four of these differences with current law are extremely large taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts. For example, the top marginal individual rate is currently paid by a lot of people who earn a lot of money. If a star actor is paid $10 million for a movie, Mr. Trump’s plan would collect about $1.4 million less from that actor. Over our country’s vast array of highly-compensated employees, this adds up very quickly.
Also important are the individual rate cuts farther down the bracket structure. While middle-class Americans have much less money to tax, they are numerous; even a small reduction in rates at the lower end of the scale could apply to nearly a hundred million households. It is worth remembering that the 0% rate on the first $50,000 of income doesn’t just apply to taxpayers earning under that amount. It applies to all taxpayers. Lowering the bottom bracket delivers a benefit to low- and high-income taxpayers alike.
The corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate is reduced twenty percentage points. The corporate income tax is the federal government’s third largest source of revenue, behind only the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. and the payroll tax.
Finally, a perhaps-overlooked but extremely important tax cut in the plan is the reduction in rates on pass-through businesses. Pass-through businesses are a large and growing share of all business in the U.S., and the rate reduction on these is very large. Consider that the top rate under the Trump plan is less than two fifths of what it is under current law. A highly productive pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. (such as, for example, some of the businesses owned by Mr. Trump) would see its tax bill fall by more than half.
Looking at these rates, collectively, note that Mr. Trump is frequently cutting rates in half, and sometimes cutting them by even more than that. Taken together, these rate reductions are enough—by my estimates—to reduce tax collections from about 18 percent of GDP to about 12 percent. Under rates as low as these, economic growth—moderate or otherwise—cannot restore federal revenues to current-law levels.
Tax cuts can do a great deal of good; each of the provisions I outlined above could help a lot of people lead better lives. However, the reductions in federal revenue need to be acknowledged, and likely mitigated through substantial cuts in spending, in order to make this plan feasible. I hope that my outline of these four key provisions explains adequately why I believe the Trump plan reduces revenue by so much.
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