Broader bases and lower rates: these are the two pillars of 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. reform. Unfortunately, when it comes to reforming America’s tax code, Donald Trump’s tax plan has only half of the blueprint; while Mr. Trump’s plan slashes tax rates across the board, it fails to broaden the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to make up for lost revenue.
First of all, what is meant by “broader bases and lower rates”? Simply put, this means lowering marginal tax rates while simultaneously increasing the amount of the economy subject to taxation, in order to keep revenues in line. My colleague Scott Greenberg puts it best in his report on Options for Broadening the U.S. Tax Base: “the only practical way to cut tax rates without increasing the deficit is by broadening the tax base.”
Why are lower rates desirable in the first place? As Greenberg finds, “high marginal rates slow economic growth and hurt international competitiveness.” Combining lower rates with a broader base “creates a simpler and more equitable tax code, by ending preferential tax treatment for certain economic activities… [and can] encourage a more efficient allocation of resources.”
Donald Trump’s tax plan successfully lowers tax rates, as seen in our analysis of his plan. He cuts the top ordinary income tax rate from 39.6% to 25%, the federal tax rate on corporate income from 35% to 15%, and eliminates estate taxes altogether. These lower marginal rates are the part of tax reform that Mr. Trump has right, but he fails to address the need for broader tax bases.
In fact, Mr. Trump significantly narrows the tax base by exempting the first $25,000 of income for single filers and $50,000 for married filers. Trump’s plan states that this “removes nearly 75 million households – over 50% – from the income tax rolls.” This means that not only are people facing lower marginal tax rates, but a considerable amount are paying no income taxes at all.
This is a major reason why Mr. Trump’s tax plan, if enacted, would hemorrhage federal revenue. Specifically, we project that Trump’s tax plan reduces revenue by $11.98 trillion over 10 years on a static basis, and $10.14 trillion on a dynamic basis after accounting for economic growth that may occur under his plan from the lower rates. According to the Committee for a Responsible Federal Budget, the economy would have to grow at a sustained 8% annual rate for 10 years to make Trump’s proposal revenue-neutral. Such growth rates in the United States have never been seen in the last century.
Furthermore, Trump’s plan barely touches any of the large tax expenditures, such as the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. , in order to broaden the tax base. One base-broadener he did include is taxing carried interest as ordinary income; he directed substantial attention towards this proposal, but it raises a comparative drop in the revenue bucket—up to $15 billion over 10 years—according to our latest book, Options for Reforming America's Tax Code. The carried interest provision is worth only 0.15% of the Trump plan’s lost revenue, at best. In contrast, the same book shows that elimination of the largest tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. —the exclusion of employer-sponsored health insurance payments from taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. —would raise more than $3 trillion, substantially mitigating the revenue losses of a rate-cutting plan.
Donald Trump’s plan to lower marginal tax rates is a worthwhile goal that should be considered in any serious tax reform plan. However, by failing to broaden the tax base, Mr. Trump’s plan misses the mark of true tax reform, and would lead to a ballooning federal deficit if enacted. In order to mitigate the revenue losses from his rate-cutting proposals, Mr. Trump should consider including more substantial base-broadening measures in his plan.
Share this article