Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > Tax Planning > Tax Deductions

Trump's Tax Proposal Is a Symptom of the Disease

Your article was successfully shared with the contacts you provided.

(Bloomberg View) — This photograph I’m looking at comes from someone I am friends with on Facebook. What is it? Eight pages of notes on how to speed-run a video game (Resident Evil 4).

And why am I telling you about this photograph? Because it is almost eight times as long as the tax plan just released by the Trump administration.

As Jim Tankersley of Vox tweeted: “It actually removes some details. We know less about this plan than we knew about Trump’s campaign plan.” My spouse put it more vividly: “It’s barely an executive summary! It’s like the notes someone jotted down after a preliminary meeting about whether to have a tax plan!” 

(Related: White House Unveils Trump’s First Tax-Cut Bid)

This is the complete list of actual policy content in the one-page release handed out to press:

Reduce the seven tax brackets to three tax brackets of 10 percent, 25% and 35% Double the standard deduction Provide tax relief for families with dependent-care expenses Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers Protect the home ownership and charitable gift tax deductions Repeal the Alternative Minimum Tax Repeal the death tax Repeal the 3.8% Obamacare tax that hits small businesses and investment income Set corporate tax rate at 15 percent, down from 35% Establish territorial tax system to level the playing field for American companies Charge a one-time tax on trillions of dollars held overseas Eliminate tax breaks for special interests

The first thing to note about this plan is that it would be really, really expensive. According to the Committee for a Responsible Federal Budget, it would cost trillions over a single decade — though no one can say exactly how many trillions, because it’s too darn vague. Call it a half a trillion dollars every year drained from federal coffers, or more than twice the cost of Obamacare. How will the Republicans pay for it? Echo answereth not.

The other thing to note is that most of the specific parts of the plan are the ones that will benefit rich people like … er … Donald Trump. Families with dependent-care expenses get “tax relief” of an unnamed nature, and a higher standard deduction. Wealthy people keep their mortgage and charitable gift deductions, get their inheritances tax-free, see their marginal income tax rate fall, no longer have to face the AMT or the Obamacare surcharge on investment income, and if they own a business, in whole or in part, see their corporate taxes dramatically lowered. (Business owners, in particular, get a bonanza, dropping the tax rate on their business income to 15%, lower than the proposed middle bracket.)

A press conference on the plan somewhat clarified the missing detail: Treasury Secretary Steve Mnuchin said that all personal deductions would go except for the ones specified (and tax-deductible retirement accounts). But the Committee for a Responsible Federal Budget report suggests that this will not be nearly enough to offset the income lost from all the tax cuts. The total effect is probably to blast a hole in the budget, somewhat ramp up the taxes on the blue-state professional class, and massively cut taxes for the Trump class.

The Future! (Image: Thinkstock)

As a matter of policy, this is not all wrong. We should move to a territorial tax system for corporate (and personal) income, to put us in line with other countries. Three brackets isn’t a terrible idea, either. And we should definitely get rid of the ability to deduct state and local taxes, which represents a subsidy to wealthy, high-tax states at the expense of poorer places with lower tax rates. If New York wants high taxes and spending, the legislature has the right to enact it. But New Yorkers shouldn’t be asking people in other states to subsidize it by forgoing federal revenue.

However, when these changes are paired with a budget-busting tax cut for the richest Americans, this starts to seem less like a matter of principle and more like political score-settling. And given the flagrant way that Trump has used government to advertise his businesses, it inevitably carries the unsavory whiff of a warm personal gesture from the president to himself.

Perhaps even more worrying, however, is the amount of detail that is still missing. During the Q&A, I heard some variant of “We’ll provide the details at an appropriate time” more than once. This after Mnuchin opened by talking about how long they’d been working on this.

This conveys the impression that the administration cares a lot about cutting taxes for very wealthy people and corporations, and considers the other elements of the plan to be filler, to be sketched in brief if at all. Unfortunately, you can’t run policy that way, because policy is detail. It’s not saying “markets should be free” or “we need more economic growth.” Tell hundreds of thousands of government employees that they need to make a more business-friendly environment, and you’ll rapidly discover the terrifyingly myriad ways in which such a directive can be interpreted by individual minds. No, what you actually have to do is create rules to follow, all of them spelled out in mind-numbing minutiae.

If the administration had actually spelled things out in more detail, we would see the same problem that’s afflicted every other administration in recent history: Detail makes enemies.

Let’s revisit the personal deduction eliminations, for example. Going to get rid of the deduction for people with high medical expenses? Enjoy the frantic phone calls from patient groups. How about educational savings accounts? Are they going away? Stand by for the firestorm of indignation from middle-class parents. If the Trump administration actually tries to enact its plans, one by one, many of its ideas, so pleasing in vague summation, will become flesh, encounter political resistance, and die an early and gruesome death.

After four months in Washington, the Trump administration is still not doing the things needed to actually govern. This tax plan is bad. But it’s not nearly as worrying as the policy-making process that produced it.

— Read Health Insurance Bill Dealmaker Draws Fire From Both Sides on ThinkAdvisor.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.