The Trump tax plan stinks.
It does a few bad things and fails to do some good things, all in the name of cutting taxes on people in the top bracket.
Who are those people? Not the rich, for sure, because the president assured us he isn’t helping the rich. So we’ll just call them the lucky denizens of the top bracket.
While the plan fails on fairness, “fair” is a loaded word, meaning different things to different people. Worse, and less debatable, is that the plan fails the basic requirement for equitable and sensible tax policy — that people in similar economic situations should feel similar effect.
Start with the (underplayed) feature of killing the estate tax. That will help people who are heirs to estates worth more than $5 million. They aren’t the rich because, again, the president said so. We’ll call them obituary-lottery winners.
Republicans have been railing against the “death tax” even longer than they have against the Affordable Care Act. What they fail to mention is that estates are also beneficiaries of a huge tax break.
At death, assets are written up to the higher of market value or cost; thus, for heirs, no capital gains tax is owed. For example, suppose you buy a share of stock at $10 and it rises to $100. If you sell, you owe a tax on the $90 profit.
If, however, you die and your heir sells the stock, no tax is owed (because the basis has been “stepped up” to $100.) This magically erases the accumulated profits of the wealthiest lottery winners across the country. Someday (hopefully far off), when Jeff Bezos’s heirs come into Amazon stock, do we really want to pretend that they have no gain on it?
Until now, this flaw has been roughly balanced by the estate tax. Although heirs didn’t pay a capital gain tax, they were subject to inheritance taxes. No more, if the Trump plan goes through. The proper reform would be to eliminate both the estate tax and the step-up in basis, so that death becomes irrelevant to tax calculations. Under the Trump plan, however, suppose two people own an asset at the same cost and that one makes a deathbed sale, while the other’s is sold immediately upon his demise. Although the families held the same investment and reaped the same profit, they are subject to entirely different tax treatments. “Bad!”
The next problem is Trump’s refusal to commit to upholding his campaign pledge to kill the loophole for carried interest. That is the term for fee income earned by hedge fund, private equity and other partnership moguls that is treated as a capital gain rather than income (the former is taxed at a far lower rate). Make no mistake, there is no intellectual justification for this break. Since the income is earned on other people’s investment, the hedge fund and private equity moguls’ capital is not at risk in producing the income in question, thus the treatment is unwarranted.
Who benefits from this? We don’t want to say the rich. We’ll just say Henry Kravis, Steve Schwarzman and their kin. Too bad a president who made a show of toughness against street protesters and football players couldn’t stand up to Wall Street.
Next is the plan’s true bombshell — ending the federal deduction for state and local taxes. This subjects taxpayers to double taxation. Suppose you pay $1,000 in taxes to Albany or Sacramento; now you’ll have to pay a further, say, $300 to the feds on the same $1,000 — even though, of course, the money is gone. This is also true of ordinary expenses. For instance, if you buy a car for $20,000, and if you bought it out of income, you still owe federal taxes on the $20,000. But the car is discretionary. You can choose to buy a less expensive car — or no car. The state and local taxes are non-discretionary. You are taxed twice on the same dollars. It’s no secret Trump is aiming at blue states, which happen to be wealthier and overall have higher taxes. He is also taking aim at federalism, supposedly a bedrock of the Republican Party.
Next was another blown opportunity: keeping the mortgage deduction. This penalizes renters and homeowners without a mortgage, and anyone who doesn’t itemize. Why tax differently on the basis of whether you rent, own or finance? The proof is that if the mortgage deduction didn’t exist, Congress would never create it. And, in fact, it never did.
Early in the 20th century, interest was made deductible as a business expense (most mortgage holders were farmers). Over time, other forms of interest were disallowed as personal deductions. The deduction for mortgages remained. Its benefits are skewed toward the non-poor and the non-middle class (guess who is left?) and it costs the taxpayers $77 billion.
Another blown opportunity was failing to reform the treatment of corporate health-care benefits. Today, companies deduct the expense, but individuals ignore the income, as if it were phantom. Once again, this introduces an inequity into the tax code. Employees who receive more of their income in the form of health-care benefits pay lower taxes.
Suddenly taxing employees on their health plans would, admittedly, be disruptive. An easier route to restoring equity: bar employers from deducting health-care expenses that the recipient didn’t declare. (No more pretending that the expense is real and the income fictitious.) This break costs the Treasury $144 billion.
The best aspect of the Trump plan, at least provisionally (many details are lacking) is the intent of simplifying and reducing corporate taxes. This potential plus does not offset the negatives. The tax breaks (both granted and retained) as well as the reduction in the top tax rate are solutions in search of a problem.
The economy is growing. If a stimulus were desired, better to hold revenue flat, borrow money at cheap rates, and put people to work on infrastructure projects. Better, that is, than to subsidize large mortgages, wealthy fund managers and wealthy heirs.