Tax Cuts Trump the National Debt
By Dr. Daniel J. Palazzolo
Donald Trump, billionaire real estate developer and television personality, rose to the top of national tracking polls for the 2016 Republican presidential nomination contest with his populist attack on immigration, political correctness, and corrupt politicians. More recently, he has proposed a tax reform plan that seeks to fulfill his larger promise to “make America great again.” Although the plan contains several components that reflect mainstream thinking among conservative economists and will increase economic growth, preliminary analyses suggest that it would greatly magnify the national debt.
Trump’s plan may well be described as comprehensive and populist. For individuals, the main goals are greater progressivity and more incentives to work. Trump’s proposal creates four tax brackets (0%, 10%, 20%, and 25%), eliminates the marriage penalty and the alternative minimum tax, and retains “many deductions” for the “middle class.” At a 0% rate, single persons making less than $25,000 and married couples making less than $50,000 would pay no taxes and presumably would receive sizable refunds. Meanwhile, although the plan eliminates all estate or “death” taxes, it does away with many deductions for the “rich.” In an appeal to the middle class, Trump announced his plan “is going to cost me a fortune.” For corporations, the plan guarantees a tax rate of no more than 15%.
Mr. Trump contends the plan is “revenue neutral” and will not add to deficits or the national debt. He contends that revenue losses from tax cuts will be made up by “reducing or eliminating most deductions and loopholes to the very rich,” repatriating overseas corporate cash at a rate of 10%, “reducing or eliminating corporate loopholes that cater to special interests,” and imposing a “reasonable cap” on deduction of business expenses. Several highlights include: curbing personal exemptions, itemized deductions, and exemptions on life insurance for the “very rich;” ending special tax treatment of carried interest; prohibiting corporations from deferring taxes on income earned abroad; and cutting “special interest loopholes.”
Yet Trump promises far more than he delivers in terms of fiscal responsibility. Trump’s strategy is consistent with several commission reports that seek to deal with the national debt (e.g. Bowles-Simpson and Peterson-Pew), a strategy that includes eliminating tax expenditures, lowering marginal tax rates, and reducing the corporate rate. But, since Trump wishes to maintain tax breaks for the vast majority of income earners and lowers rates far below other plans, his proposal has drastic consequences for the national debt.
The conservative leaning Tax Foundation predicts that, over ten years, Trump’s plan will increase economic growth (GDP) by 11.5%, capital investment by 29%, wages by 6.5%, and jobs by over 5.3 million. However, the plan fails to deliver on promise of revenue neutrality. Even with the Tax Foundation’s growth assumptions, the plan will cause revenues to decline by $10.2 trillion over ten years. Citizens for Tax Justice, a liberal leaning advocacy organization, predicts that Trump’s plan will cost $11 trillion revenue over ten years.
Of course, the federal government is already deeply in debt, but Trump’s plan will make matters much worse. The national debt, which grows at a rate of roughly $2 billion per day, currently exceeds $18 trillion Economists are more concerned with the debt as a portion of the size of the economy, i.e. the debt to GDP ratio, than the total debt because the debt to GDP ratio is a better indicator of a country’s ability to pay its creditors. In addition, in a widely debated paper on the subject, Carmen Reinhart and Kenneth Rogoff have reported that countries with a 90% debt to GDP experience slower economic growth.
The publicly held debt stands about 74% of GDP and is projected to grow to 77% of GDP over the next ten without any changes in policy. According to the Committee for a Responsible Federal Budget, if Trump’s plan were enacted, the projected debt would climb to over 125% of GDP, which puts the United States well within range of the debt levels seen in countries like Greece.
Trump has linked his tax plan to the broader message of his campaign by announcing that those in the 0% tax bracket would fill out an IRS form entitled “I win.” But if Trump’s plan became a reality, he should also send a letter to national treasury and the next generation of taxpayers that states, “you lose.”
Dr. Daniel Palazzolo is the char of the Department of Political Science at the University of Richmond. His research focuses on partisan cooperation and the polarization in Congress.
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