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Trump’s Tax Plan Is a Pointless Gift to the Wealthy

WASHINGTON, DC - SEPTEMBER 26:  U.S. President Donald Trump waves as he walks on the South Lawn prior to his departure from the White House September 26, 2017 in Washington, DC. President Trump is travelling to New York City to participate in a roundtable with Republican National Committee supporters and deliver remarks to an RNC finance dinner.  (Photo by Alex Wong/Getty Images)
Our fearless leader.
Alex Wong/Getty Images

Like a muggy, miserable summer passing into fall, Republicans have finally moved on from their bumbling efforts to repeal the Affordable Care Act and have turned their attention to a task they’re more naturally comfortable with: cutting taxes. With President Trump set to stump for it later in the day, party leaders unveiled their long-awaited tax plan Wednesday morning. The outline skips critical details necessary to understand exactly how much it will cost and who will benefit most, but it’s fleshed out enough to provide a reasonable sense of what the GOP wants to achieve. And what it wants to achieve is maddeningly pointless.

Those goals largely consist of a massive tax reduction for companies and business owners. Under the plan, corporations would see a new top rate of 20 percent, a move that could cost the government $1.8 trillion over a decade, according to previous estimates. Profits earned overseas would be totally exempted from U.S. tax, sparing companies such as Apple and GE the hassle of keeping their earnings offshore while draining more revenue from the treasury. Pass-through businesses like the Trump Organization, whose owners currently pay taxes on their profits as individual income taxes, would get a special, low, low 25 percent rate, mimicking the disastrous supply-side experiment that Kansas recently abandoned because it gutted the state’s finances.

There may be some more straightforward giveaways to wealthy families, too. Republicans would smash down our seven current income tax brackets to three, with a top rate of 35 percent instead of today’s 39.6 percent. The plan would entirely kill off the estate tax, which (contra the GOP’s sappy rhetoric about small family farms) only hits multimillionaires, as well as the alternative minimum tax, which personally cost Trump $31 million in 2005.

Why do any of this? To hear Republicans tell it, Americans are buckling under the weight of our tax system today. “Tax reform is the most important thing we can do to restore confidence to this country, to get jobs and prosperity,” House Speaker Paul Ryan told reporters Wednesday. “That is why we are so singularly focused on getting this done this year.” Trump is fond of calling the United States the “highest taxed nation in the world.” This is transparently untrue. Our total tax burden is in fact one of the lowest among developed or middle-income countries, according to the Organisation for Economic Co-operation and Development. Our corporate rate is the world’s highest on paper but relatively average in practice because it offers companies so many breaks and loopholes. And by any reasonable standard, big business appears to be doing fine. After-tax corporate profits spiked following the recession and, as seen in the graph below, are now hovering comfortably above their historical share of the economy. Overall, federal taxes eat up the same share of our gross domestic product as they did in 1987, when Ronald Reagan was president, and less than in 2000, when the economy was booming.

Chart of corporate profits after tax
Federal Reserve Bank of St. Louis

Meanwhile, income inequality has been on the march for decades, and since 2000 its rise has been driven entirely by rising incomes for pass-through business owners—the very group Republicans want to lavish with a special, rock-bottom tax rate.

Could tax cuts boost the economy at least a bit? Some of them might, but not nearly enough to make up for their costs—especially if you believe that government debt can crowd out private economic activity (which was Republican gospel until fairly recently). Economists have been able to find very little obvious relationship between the top individual income tax rate and growth. Many mainstream economists do argue that cutting corporate taxes helps the economy and boosts wages by encouraging companies to invest (that’s why official government forecasters like the Congressional Budget Office think that workers reap about a quarter of the benefits from any corporate tax cut). But there’s little certainty about how big those effects are, and aside from a few devoted supply-side acolytes, almost nobody believes a tax cut for Walmart and Apple will work the kind of wonders Trump has promised. “We’re not going to move the growth rate from 2 percent to 3 percent,” University of California–Berkeley economist Alan Auerbach told me a while back. “I don’t think there’s any conceivable change in the tax system that could do that.”

Any good a corporate tax cut might do for the economy also needs to be judged against other ways that money could be spent. Republicans have agreed on a budget that would leave room for $1.5 trillion in cuts. Would you rather spend that money boosting Goldman Sachs’ and General Motors’ bottom line, in the faint hope that some of that cash eventually trickles down? Or would it be better spent rebuilding our roads and public transit, funding a reasonable health care system, or bringing down college costs? Do I even really need to ask that question?