Notes on Trump’s Tax Policy Speech in Missouri

August 31, 2017

Yesterday, President Trump laid out his goals for a federal tax overhaul, during an address in Springfield, Missouri. While the speech was short on detail, the broad objectives outlined by the President provide a good starting point for thinking about what a potential tax reform could look like.

In the address, Trump listed four principles for what a tax reform bill should include:

1. “A tax code that is simple, fair, and easy to understand. That means getting rid of the loopholes and complexity that primarily benefit the wealthy and special interests.”

The President began his address with a call for eliminating loopholes from the federal tax code. This is probably a good sign: too often, when lawmakers talk about tax reform, they focus only on the benefits of lower tax rates. But closing loopholes in the tax code is also a vital part of tax reform: it helps offset the revenue loss from lower tax rates, while helping to level the playing field between different economic activities in the tax code.

Of course, talking about simplifying the tax code only goes so far; at some point, lawmakers will actually have to specify which provisions in the tax code they intend to eliminate. Luckily, they will have many options: there are over 150 credits, deductions, and other preferential provisions in the federal tax code, which will collectively reduce federal revenue by trillions of dollars over the next decade. Lawmakers should feel emboldened by the President’s remarks to target the vast majority of these provisions for elimination (while preserving provisions that are genuinely broad-based and structural), and use the revenue to lower tax rates across the board.

2. “We need a competitive tax code that creates more jobs and higher wages for Americans…We would like to bring our business tax rate to 15 percent.”

The second principle in the President’s speech was that a tax reform bill should be oriented toward economic growth. This is actually not a trivial point: every tax change affects the U.S. economy differently, and lawmakers should be careful to choose tax changes that offer the biggest economic bang for their buck.

Specifically, the President called for lowering business tax rates in the United States. This is a promising direction: the corporate income tax is one of the most dysfunctional features of the federal tax code, and the U.S. statutory corporate rate is the highest in the developed world. However, the President neglected to mention other opportunities for pro-growth reform of the business tax code, including full expensing – which would have a stronger economic effect than a simple corporate rate cut.

In addition, the President did not specify exactly what he meant by “our business tax rate.” In the past, the Trump administration has indicated an interest in creating a new, preferential tax rate for businesses that are not taxed as corporations (known as pass-through businesses). But this approach would raise several challenges and could complicate efforts to simplify the federal tax code.

3. “Tax relief for middle-class families…This includes helping parents afford childcare and the cost of raising a family.”

The third principle outlined by the President – lowering taxes for middle-class families – is probably the most challenging one. This is because providing tax relief is expensive, leading to lower revenue for the federal government. Meanwhile, Republicans are trying to pass a tax bill through the reconciliation process, which prohibits legislation from increasing the federal deficit in the long run. Trying to pass a large middle-class tax cut alongside a tax reform package could make the legislative math very difficult.

4. “We want to bring back trillions of dollars in wealth that’s parked overseas.”

The final principle listed in the President’s speech is probably the least compelling of the four. It is true that, the U.S. worldwide tax system incentivizes companies to hold trillions in assets overseas by taxing multinationals when they transfer their money from their foreign affiliates to the United States. However, there is not clear evidence that policies to temporarily encourage companies to bring their money back to the U.S. would lead to a larger economy in the long run.

Instead of focusing on the money that U.S. companies currently hold overseas, the President should focus on how to reform the tax code’s rules regarding foreign income going forward. Many lawmakers have called for moving to a territorial tax system, under which companies would no longer be taxed on income earned in foreign countries. Such a system would likely be an improvement over current law, but would also require new rules to define where income is earned and safeguards to prevent abuse and base erosion.


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