Trump the Tax Reformer

Something to look forward to.

Photographer: Michael Nagle/Bloomberg

Come Jan. 20, President-elect Donald J. Trump will start carrying out his agenda. How does he expect to turn promises into policy? Do his plans make sense? If not, what should he do? Finally, given the political realities of Washington, what’s most likely to happen? This is part of a series of editorials that try to answer these questions.

What he says he’ll do: Trump says he’ll cut the corporate tax rate from 35 percent to 15 percent and impose a new one-time tax of 10 percent on profits held abroad. The seven brackets of the individual income tax would become three -- 12, 25, and 33 percent. The alternative minimum tax would be scrapped. Likewise the estate tax, though capital gains of more than $5 million ($10 million for joint filers) would be taxed at death. The standard deduction would rise to $15,000 ($30,000 for joint filers). There’d be a new child-care deduction, but the value of all deductions would be capped at $100,000 ($200,000 for joint filers).

Does that make sense? The plan would cut revenue by $6 trillion over the first 10 years, assuming no increase in growth. In later years, higher interest on government debt would make the shortfall bigger. Households would pay less tax on average, with the savings skewed to the rich: Middle-income households would see after-tax incomes rise roughly 2 percent; the richest 1 percent would get a raise of 13.5 percent. The higher standard deduction would spare millions of Americans the need to itemize. But the gap between the corporate rate and the highest individual rate would grow, encouraging high earners to call themselves businesses to avoid tax.

What he ought to do: The plan cuts revenue too much -- especially since Trump wants to increase public spending. Scrapping (not capping) most deductions would make it less expensive, and simpler, too. Cutting the corporate tax rate less sharply would help. A higher top rate and reformed (not eliminated) estate tax would shrink the revenue gap and make the reform more favorable to the middle class.  

The most likely outcome: House Republicans have a tax-reform plan with a smaller revenue shortfall. It eliminates most deductions and reduces the corporate rate to 20 percent (25 percent for pass-through businesses), not 15 percent. Trump has already moved in their direction, and is likely to move some more.  

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.