Taxes

Today's Tax Cuts Are Tomorrow's Tax Increases

Before you get too excited about Trump's proposal, consider how the revenue will eventually be made up.

Shift your perspective.

Photographer: Brendan Smialowski/AFP/Getty Images

For all the analyses of President Donald Trump’s tax plan, one big factor is missing for a final assessment. Once we’ve lost some revenue, which taxes will need to rise in the future? In other words, the plan is really a (less glorious) tax shift rather than a tax cut.

The Trump administration’s plan is short on specific numbers, which is not a surprise but also a sign that it will not be revenue neutral. Even more detail-oriented administrations tend to fudge their fiscal projections, so the Trump plan will probably increase the budget deficit significantly. By one estimate -- admittedly far from definitive -- the Trump plan will cut revenue by $4.2 trillion.

QuickTake Tax-Reform Terms You Need to Know

Just think about the details we do know. The plan will cut marginal rates on many well-off taxpayers, who indeed contribute much of U.S. income tax revenue. It will lower corporate tax rates, make it easier for many entities to use a relatively low pass-through rate, eliminate the inheritance tax and double the standard deduction. Those are major revenue losses. Higher economic growth may make up some of the difference, but it’s hard to find serious economists who think the tax cuts are anything close to self-financing.

How might the plan make up for that lost revenue? So far, the biggest revenue-raiser seems to be the elimination of the deductibility of state income taxes. That’s the part of the plan least likely to survive congressional scrutiny. Most state and local government officials, including Republican governors, are likely to oppose that change. Lobbies connected to schools, prisons and local infrastructure -- by no means all left-wing groups -- will scream. Republican representatives in high-tax swing states, such as New Jersey, have a strong incentive to oppose it, because it would mean financial losses for their constituencies and perhaps cost them their seats.

In the end, there just aren’t many politically unpopular tax deductions of consequence. Similarly, I don’t see the momentum for major cuts in government spending. It’s been a long time since the Republican Party has so dominated the federal government, and yet little in the way of major legislation is being passed, much less controversial spending cuts. The older, white Americans who receive a significant share of Social Security and Medicare benefits are a big part of Trump’s base, and he is more likely to play to them than alienate them. The mere passing of time, combined with the aging of America, is likely to increase the fiscal burden on the federal government. By now, there’s plenty of evidence that the longstanding Republican philosophy of “starve the beast” -- limit the size of government through tax cuts -- doesn’t achieve its desired ends.

Now let’s fast forward 10 years or so, when the U.S. is an older nation, and the fiscal burden of Medicare and Medicaid and Social Security will be greater. Most likely, today’s tax cuts, if they happen, will have to be paid for with tax increases.

So which future taxes are most likely to rise?

If a Democratic administration is in power, I would expect higher tax rates on capital gains and higher marginal tax rates for the highest earners, perhaps including new surcharges. Hillary Clinton campaigned on tax ideas along these lines, and the Democratic Party seems to have been moving toward the left since the presidential election. To get the temporary tax reductions now, and then these higher rates in the future, hardly seems like a good bargain. I’d rather have more even rates throughout, an economic idea known as “tax smoothing.”

What if a Republican administration is in power when future taxes must rise? Those options are harder to forecast, but one possibility would be a revival of House Speaker Paul Ryan’s “border adjustment tax” idea, which is a move toward a value-added-tax structure. The Republicans also might look to reinstitute higher tax rates on wealthier earners, much as the Democrats are likely to do, all the more so if there is divided government. Again, that hardly looks like such a great deal from the view of a radical tax-cutter.

It’s easy enough to pick on unpopular taxes as the problem, but the main issue is cultural presuppositions about what government should and should not do. That’s where any real tax reform would need to come from.

The bottom line is this: Anytime you hear a news report on the Trump “tax cut,” substitute the phrase “tax shift.” Then ask yourself how excited you should be.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Tyler Cowen at tcowen2@bloomberg.net

    To contact the editor responsible for this story:
    Stacey Shick at sshick@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE
    Comments