Trumps proposed tax reform is hardly reform at all
THE PRINCIPLES of tax reform, individual or corporate, are clear: Congress should improve efficiency by levying lower rates on a broader base of income; that is, with a minimum of incentive-distorting loopholes and deductions. Reform should encourage economic growth but mitigate income and wealth inequality. The resulting revenue should enable the federal government to meet public needs without adding to the national debt.
The last time the political stars aligned to produce such legislation was 1986. The tax code has accumulated new inefficiencies and irrationalities since, notwithstanding many reform proposals by Republicans, Democrats and even some bipartisan coalitions over the years. Now the GOP sweep of the White House and both chambers of Congress may set the stage for the most extensive rewrite of taxation since then — one that, unlike the 30-years-ago version, which was bipartisan, the Republican Party will dominate.
President-elect Donald Trump and his team are sending mixed signals. During the campaign, he put forward an irresponsible plan to slash revenue by an estimated $620 billion per year (roughly 19 percent of fiscal 2015 receipts) over 10 years, with no credible offset in the form of spending cuts. Meanwhile, the top 0.1 percent of taxpayers would experience an average tax cut of nearly $1.1 million, while households in the middle fifth of the income distribution would receive an average tax cut of $1,010, according to the Tax Policy Center . On Wednesday, however, Mr. Trump’s choice for secretary of the Treasury, Steven Mnuchin, spoke reassuringly, but cryptically, of middle-class relief with “no absolute tax cut for the upper class.” Rate cuts for the rich could be offset by eliminating itemized deductions, such as the break for mortgage interest or state and local taxes, Mr. Mnuchin said, though most experts say that won’t actually work for the rates Mr. Trump proposed.
Possibly the Trump camp is moving toward the somewhat more plausible blueprint laid out by House Speaker Paul D. Ryan (R-Wis.) in June. It would reduce federal revenue by a mere $3.1 trillion over 10 years, according to a Tax Policy Center analysis. This is better than Mr. Trump’s plan, but still hardly fiscally responsible absent big spending cuts to federal programs — which the GOP also proposes, but which are notoriously harder to pass than tax cuts. Meanwhile, most of the House GOP plan’s benefits would accrue to the well-to-do, in part because the plan eliminates what’s left of the estate tax, one of federal law’s few modest restraints on wealth inequality.
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