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Does Trump Tax Plan Cut Me In?

Binyamin Rose

Two Leading Economists See More Pros than Cons

Wednesday, April 26, 2017

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BURIED UNDER President Trump and Treasury Secretary Stephen Mnuchin (L) hope the economy can outgrow the country’s mounting debt load (Photo: AFP/Imagebank)

P resident Trump’s tax reform plan, at least according to the broad outline set for release this week, will put a little money back into most people’s pockets, a lot of money in the hands of corporate America, and leave the federal government cash starved as the national debt approaches $20 trillion.

The Trump plan would simplify the tax code, reducing the number of tax brackets from seven to three — 12%, 25%, and 33%. This would return about $400 to $500 a year for lower middle class families earning between $30,000 and $50,000 a year, and $1,000 to $1,500 for those earning between $50,000 and $100,000 a year. The tax savings grow exponentially for those earning well into the six figures. The maximum corporate tax rate would be slashed from 35% to 15%. Overall, the Urban-Brookings Tax Policy Center estimates the tax cuts would sink the government $15 trillion deeper into debt over the next 20 years.

More details will follow in June, but it’s important to remember that a president is free to propose whatever he wishes, but under the Constitution, the House of Representatives drafts tax policy. House Speaker Paul Ryan has some ideas of his own that clash with Trump’s. If Trump was unable to ram his health care reform plan through the Republican-controlled Congress, he is unlikely to fare better with tax reform, at least initially.

Ronald Reagan had to wait until 1986 — the second year of his second term — to push his major tax reform bill through Congress, and it wasn’t easy, even after he won 49 of 50 states in his 1984 reelection. Reagan had difficulty selling the concept that the government could raise defense spending and cut taxes at the same time, with the resulting brew stimulating enough economic growth to cover the deficits. The plan was branded “voodoo economics” by political rivals.

Whatever incantations he used, it worked.

“In my view, it is not a coincidence that the 1986 tax reform was followed by the longest boom in postwar US history and nearly paid off the debt,” says John Cochrane, a senior fellow at the Hoover Institution at Stanford University. “Conventional wisdom tends to ignore the growth benefits of lower marginal rates, especially over time. With higher taxes, people start fewer businesses and choose easier college majors and professions, so the damage grows over time.”

And some taxes are worse than others, Cochrane contends. “Capital gains taxes are easily avoided by not selling stocks. Estate taxes attract an industry of accountants and lawyers to avoid them. In both cases avoidance strategies gum up the economy.”

While parallels exist between the Reagan and Trump plans, Trump faces a major obstacle Reagan did not.

In 1986, the federal debt was a “paltry” $2 trillion, or 46% percent of GDP. Which roughly means that the US economic output was double every dollar it owed. Thirty years later, the national debt is over 100% of GDP and that’s just the beginning, says Laurence Kotlikoff, a professor of economics at Boston University. Kotlikoff testified before the Senate Budget Committee in February 2015, arguing that America’s real fiscal gap is over $200 trillion, including deficits in Social Security, Medicare, and Medicaid, and extrapolating them forward to the next 75 years.

President Reagan passed tax reform in a bipartisan fashion now rare to D.C.

“Right now, we’re on a path to bankrupt our children,” says Kotlikoff.

While it’s too much to expect economic miracles in 100 days, bringing jobs back to America is one of the benchmarks by which the Trump administration will be measured. If his tax reform is a page out of Reagan’s playbook, Trump might want to emulate Reagan in another respect — the one in which he not only united his own party behind him but also reached across the aisle to snatch enough Democratic votes to push his agenda forward.

It sounds like an implausible strategy in this polarized political climate, but it doesn’t have to be, says Kotlikoff, who says he opposes Trump politically, but supports Trump’s plan to slash corporate taxes.

“It will give incentive for corporations to move operations back to the US, instead of the current system, where the very high marginal effective tax rate is driving capital out of the US, which hurts workers,” Kotlikoff says.

And therein lies its selling point with liberal Democrats, such as House Minority Leader Nancy Pelosi.

“They should be arguing the current corporate tax system is a tax on workers and by lowering the rate, we’re replacing that with a tax on wealth,” Kotlikoff says. “If Nancy Pelosi understood economics, she would realize this is her fantasy dream come true.” (Originally featured in Mishpacha, Issue 657)

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