IN THE run-up to the announcement of President Trump’s tax reform proposal last week, Treasury Secretary Steven Mnuchin spoke of simplifying the tax code to the point where Americans could fit their returns on “a large postcard.” The same should not be true of a major presidential policy rollout on such a complex topic — yet that is what Mr. Mnuchin, accompanied by National Economic Council Director Gary Cohn, produced.
What few details their slapdash one-pager did contain suggest that it would dramatically decrease taxes on those who are best able to afford them — necessitating trillions of dollars in new federal borrowing. Essentially, it is the revenue-side equivalent of Mr. Trump’s earlier plan for spending cuts, “the skinny budget”: an ultra-conservative Republican wish list with a good chance of exciting the GOP political faithful and almost no chance of becoming law.
Billed as “the biggest individual and corporate tax cut in American history,” the Trump plan rests on the faulty premise that the economy’s woes are somehow due to a crushing tax burden. In the first place, the economy is not doing too badly; despite a lackluster first-quarter growth number, the United States is functioning near full employment. A recent Gallup survey, in fact, found that only 8 percent of Americans fear being laid off, the lowest share since Gallup first asked the question in 1975. Moreover, 61 percent of the public consider their tax burden “fair,” a post-recession high. Mr. Trump’s massive tax cut is a solution in search of a problem.
What the U.S. economy needs most, at this stage of its recovery, are measures designed to boost productivity, which has been growing at well below historical rates. Productivity, in turn, could benefit from tax reform, one that did not reduce federal revenue, but enabled the government to collect it more efficiently. Reform of the corporate code, not individual taxes, is most urgent — in terms of boosting productivity. U.S. firms are subject to the highest top nominal tax rate in the industrialized world, 35 percent, a major reason that businesses shift overseas, or at least report their income abroad, beyond Uncle Sam’s reach.
The classic repair would be a lower rate, paid for by closing loopholes. Mr. Trump’s plan suggests a 15 percent rate, which would reduce federal revenues by at least $143 billion in 2018, according to a recent analysis by economists Eric Toder and Alan D. Viard; but the president offers no way to pay for it beyond a vague promise to “eliminate tax breaks for special interests.” The House GOP, by contrast, has a proposal to cut the corporate rate to 20 percent, offset by a massive tax on business imports; by omitting any mention of that approach, Mr. Trump seems to reject it.
The House plan is but one of several original, if imperfect, ideas for corporate reform circulating in Washington. Mr. Toder and Mr. Viard, for example, have a plan to pay for a rate cut with higher taxes on individual dividend earnings. The Trump team’s mish-mash of weak ideas accomplishes little but to divert time, energy and political capital from stronger ones.
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