You thought tax reform would be an easy win for Republicans?
Oh, it feels good to laugh again.
After the Obamacare-repeal disaster, President Trump has decided to move on to tax reform. He’s hoping to quickly restore public faith in his leadership, which has so far been stymied by federal judges, the House Freedom Caucus and basic math.
But many of the issues that brought down repeal-and-replace will dog his tax plan, too.
Some of these are procedural, and relate to arcane Senate rules governing the ﬁlibuster. Some concern the fact that every change to the tax code — as with every change to health care — involves painful trade-offs and angry interest groups that will work to obstruct said change.
The biggest hurdle, however, is not about technicalities or political transactions. It’s about substance. As with health care, the Trump administration has made too many contradictory, sometimes mutually exclusive promises that will be impossible to keep.
In particular, Trump’s many scattershot promises about what’s going to happen to wealthy people’s taxes.
“The rich will pay their fair share,” Trump the populist promised his supporters during the campaign, when he often railed against upper-class greed and special-interest tax breaks.
Since then, Treasury Secretary Steven Mnuchin has repeatedly pledged that the administration would offer life-changing, economy-transforming tax cuts for the working class. Any tax-rate cuts for the wealthy, on the other hand, would be fully canceled out by closing deductions, credits and other loopholes. On net, the wealthy would pay the same amount they are now — hey, maybe more!
“There will be no absolute tax cut for the upper class,” Mnuchin promised.
This guarantee — that unlike all other Republicans, Trump did not plan to cut taxes on the rich — was so bold and unusual that it even earned a nickname. At Mnuchin’s confirmation hearings, Sen. Ron Wyden (D-Ore.) dubbed it the “Mnuchin rule.” In a CNBC interview, Mnuchin expressed pride at being the namesake of an official “rule,” blithely remarking that this put him in the company of Paul Volcker and Warren Buffett.
Of course, if you actually look at Trump’s tax plan, you’ll see that this “rule” was made to be broken.
The Trump tax plan released last fall, which Mnuchin helped to author, includes enormous “absolute” tax cuts for the rich, even after accounting for the elimination of deductions and credits. In fact, according to an analysis by the nonpartisan Tax Policy Center, Trump’s plan would give rich people the biggest tax cuts of any income group.
That’s true however you slice it. The top 1 percent of taxpayers get the biggest cut in raw dollar terms, as a percentage of their incomes and as a percentage of total tax cuts. They’d receive nearly half the total tax cuts under Trump’s plan (and three-quarters of all the cuts under the House GOP plan).
The one and only concrete example Trump has offered of how he would force rich people — or at least, a tiny subset of rich people — to pay their “fair share” is his proposal to close the so-called “carried interest” loophole.
But even that’s a lie.
“Carried interest” refers to the cut of client profits collected by managers at certain kinds of investment funds (such as private equity and venture capital funds). It’s basically a performance fee. Under current law, that fee gets taxed at long-term capital gains rates (20 percent) rather than at ordinary wage income rates (top rate of 39.6 percent).
Trump has pledged to close this loophole by treating “carried interest” as ordinary income. Which is great, and much fairer than the current state of affairs. At least it would be if Trump didn’t offer these same taxpayers a much, much more valuable tax cut.
Buried in Trump’s plan is a provision allowing owners of pass-through businesses (which include sole proprietorships, partnerships and S-corporations) to be taxed at a flat rate of 15 percent rather than the regular individual income-tax rates. The investment fund partnerships that currently benefit from preferential rates on “carried interest” would qualify for this special pass-through rate.
Trump claims he’ll soak Wall Street, but he’s really just allowing investment fund managers to swap one preferential tax rate for another, even lower one. He’s cutting their taxes, not raising them.
All of which is to say: Just as all of Trump’s health-care promises proved impossible to square, so too will his tax populism collide with the plutocratic reality of his true priorities.
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