According to Gallup this week, 57 percent of Americans believe that their federal income taxes are too high. That fact alone should help put the wind at the backs of members of Congress pushing for tax cuts this year. The Trump administration presented its “plan” this week, and that plan should provide further impetus for action.
On the face of it, the Trump plan is silly. By some estimates, the proposed cuts would cost upwards of $6 trillion over the ten-year scoring window. No doubt, that number will be trimmed down when "dynamic scoring" is taken into account. Trump's original plan was twice as silly--$12 trillion in tax cuts--and at the time the Tax Foundation scored the cost as just over $10 trillion, taking into account the impact of tax cuts on economic growth. By extension, Trump's new $6 trillion plan might only cost $5 trillion. But whether the number is $6 trillion or $5 trillion, it isn't budget neutral by any extent.
Six trillion might sound like a lot in terms of increasing the deficit, but it also buys a lot of friends. For deficit hawks in Congress--House Speaker Paul Ryan most notably, but also the Freedom Caucus and those with roots in the anti-debt Tea Party--this looms to be a come-to-Jesus moment. Donald Trump ran on deficit-busting tax cuts, and he was elected on deficit-busting tax cuts. If those members of Congress want to face down the President, they are going to have to stand up to a lot of high paid lobbyists and powerful industry groups--to say nothing of a lot of lies and silliness about dynamic scoring--along the way. As Bruce Bartlett--the author of the Reagan tax cuts and Bush 41 advisor--has observed, tax cuts have long since lost their supply side justification, they are all just about politics now.
Treasury Secretary Steve Mnuchin and Gary Cohn did their best to sell the plan as being about economic growth, and avoid micro-details (to use Gary Cohn's word) about who--most notably the President--would benefit. What they lacked in details, they made up for with adjectives. Massive. Enormous. Critical. Huge. This is language right in Donald Trump's wheelhouse, and if deficit hawks were troubled by size of the plan, they must also know that big plans garner lots of supporters, and to call Trump's tax plan big is an understatement. It is, in fact, huge.
Donald Trump understands as well as any politician in memory exactly who has supported him and what they are looking for in return for that support. He won the evangelical vote by promising Neil Gorsuch--metaphorically speaking--and he delivered. He built his "base" by alternately appealing to and stoking the resentments of white working class voters, and each day he looks for ways to maintain that visceral connection. And he won the large swath of economic conservatives--that cohort of voters motivated by tax cuts and less restrictive federal regulation--on the prospect of both. This week, he put his money where his mouth is. Or, more accurately, someone else's money--notably future taxpayers who someday will have to pick up the $6 trillion tab should the proposed tax cut package make it to his desk.
Those who dismiss the possibility of Trump’s plan―or a reasonable facsimile―being signed into law should consider what money can buy. The Trump plan contains truly huge cuts in corporate taxes―sufficient alone to keep industry groups and K Street lobbying firms working overtime for months to come. Perhaps even more significant is the proposal to tax pass-through income―partnerships, Subchapter S corps and the like―at the new 15 percent corporate rate. For those who complained that Trump has benefited over the years from the panoply of tax breaks that privilege real estate investors, he is now proposing to level the playing field not by getting rid of those tax breaks, but instead by offering similar benefits to millions of small business and professional firms. This is a gift of enormous value that will not only entice many heretofore reluctant supporters to his side, but, if passed, should secure the support of those voters four years from now, should Democrats continue down the path to the left at the urging of their activist base.
From early on in his presidential campaign, Donald Trump swore that he would end the carried interest loophole that effectively allows many in the investment, venture capital and private equity worlds to have their ordinary income taxed at the lower, capital gains tax rate. Attacking the carried interest loophole was seen by some as political cover for Trump’s first, $12 trillion tax cut plan. While the plan introduced this week is silent on carried interest, it appears to make the issue moot. Under the Trump plan, those investors income could prospectively be treated even better than it is now, by falling under the 15 percent pass-through rate rather than at the proposed 20 percent rate on capital gains for which it might otherwise be eligible under the old rules. Rather than producing a tax hike for those investors as he promised over the course of the campaign, Trump may be giving them an additional tax cut.
Then there is the personal income tax side of the equation. It is here, more than on the corporate side, that the marketing of the plan has a stroke of genius. During the presidential campaign Trump insisted that wealthy taxpayers would get no benefit from his tax plan, which would instead deliver massive cuts to the middle class. Mnuchin doubled down on the Trump promise shortly after the inauguration, when he stated that “Any reductions we have in upper-income taxes will be offset by less deductions, so that there will be no absolute tax cut for the upper class.”
There were always two problems inherent with that promise. First, wealthy taxpayers pay most of the taxes in this country―a fact at odds with Democrat rhetoric and beliefs, but nonetheless a fact―and if one cuts income tax rates, it is very difficult not to have those at the upper end of the spectrum who pay the lion’s share of income taxes derive a benefit. And so it is in this case. Contrary to Trump and Mnuchin’s promises, the Trump plan delivers massive cuts in income taxes to the wealthiest taxpayers by lowering rates on ordinary income, capital gains and dividends. But then it goes farther, and eliminates the Obamacare tax on investment earnings, the Alternative Minimum Tax and the Estate Tax. It includes, quite simply, everything wealthy Americans could ever want to find under the tree on Christmas morning.
Second, as Mitt Romney famously pointed out four years ago, approximately half of Americans―47 percent was the number Romney pointed to at the time―pay little or no federal income tax. In the press conference introducing the Trump plan, Mnuchin suggested that in addition to reducing the current seven tax brackets to three, with tax rates of 10 percent, 25 percent and 35 percent, there would effectively be a new tax rate of zero for families earning less than $24,000. The misleading aspect of Mnuchin’s boast is that, according to Congressional Budget Office data, a family with $24,000―which is at the upper end of the first quintile of taxpayers―now pays a net income tax rate of negative 7.2 percent (net of the refundable tax credits, including the Earned Income and Child Care tax credits) . Mnuchin’s statement is misleading because those taxpayers whom he says will enjoy a zero tax rate under the Trump plan are already paying no federal income tax. (And, it should be noted, neither Cohn nor Mnuchin suggested that the Trump plan would eliminate the payroll tax, a flat tax that is distinct from the income tax and dedicated to funding Social Security.)
This was always the problem with the Trump tax cut rhetoric. A massive income tax cut for people who are not paying much to begin with is hard to deliver. But as Donald Trump knows better than any politician we have ever seen, the truth of what you say matters far less than the conviction with which you say it. This is where the stroke of genius resides in the plan as proposed. And Trump will sell it well: We are getting rid of all those special interest deductions for the wealthy. That I can tell you. And we are lowering the bottom rate to zero. It doesn’t get much lower than zero. Right? Much of Trump’s base lies well within the 47 percent of taxpayers that Romney held in such contempt, but they love Donald Trump and many actually believe what he tells them. If Trump’s tax plan becomes law and he declares that he has delivered to them what he promised―a huge, massive, beautiful tax cut―they will believe him, whether or not they get anything out of it.
The problem with the Gallup suggestion that 57 percent of Americans believe that their federal income taxes are too high is that it is hard to come up with 57 percent of Americans who actually pay much in federal income taxes. According to CBO data, in addition to the first quintile rate of negative 7.2 percent, the second and third quintile of households pay net tax rates of negative 1.2 percent and positive 2.6 percent, respectively. Those three quintiles represent 60 percent of American households. In sum, those 60 percent of households pay an aggregate net negative tax rate of -1.3 percent. That is to say that the cost of the refundable tax credits received by that 60 percent of taxpayers more than offsets their entire federal income tax liability. Including the payroll tax, which approximates 8 percent for that cohort of taxpayers, those 60 percent of taxpayers pay 13.6 percent of total federal taxes.
Since the Reagan Revolution, lower income taxpayers have provided the votes to deliver tax cuts for wealthy Americans. The power of tax cut rhetoric is powerful, and it endures. Trump’s tax plan will garner support that is broader and deeper than his election majority, for the simple reason that there will be something of real value on the table this time. Millions of Americans who stand to gain from the tax cuts will likely throw caution―and deficits―to the wind, and clamor for their passage. Corporate America is already all-in. The Trump voters will be all in even if they get little out of it, because―facts be damned―they will be thrilled that their man is once more delivering what he promised. And those who will pay the cost of the $6 trillion when the bill finally comes due will have little to say on the matter, as most of them have not yet been born.
Follow David Paul on Twitter @dpaul. Artwork by Jay Duret. Check out his political cartooning at www.jayduret.com. Follow him on Twitter @jayduret or Instagram at @joefaces.