It would be unfair of us to criticize President Donald Trump's tax plan as a gold-plated give-away to businessman Donald Trump. We do not in fact know that his proposal to slash tax rates more than in half for corporations and business entities like the one he and his family control would save him millions in taxes. After all, he has refused to release his tax returns, so how can we say?
But the prospect that today's hastily concocted tax reform announcement — the promise of which appeared to surprise everyone from Capitol Hill to the Treasury Department — would enrich the president personally is just the tip of the iceberg when it comes to the reasons it should not (and almost certainly will not) become law. The fiscal and political realities of what the Trump administration has proposed make it a non-starter, even for tax-hating Republicans in Congress. This is not a serious proposal for overhauling a bloated, convoluted and frequently unfair tax code.
For the sake of argument, let's take the centerpiece of the plan at face value. Mr. Trump wants to cut the corporate tax rate from 35 percent to 15 percent and to allow so-called pass-through entities (like those that make up Mr. Trump's private business) to pay at that same rate rather than on the personal income tax scale. Conceptually, lowering the corporate rate makes sense. The 35 percent rate is far higher than most other developed nations, yet many corporations pay nowhere close to it because of loopholes and tax avoidance schemes. Moreover, the effective rate paid varies substantially by industry based on the strength of its lobbying efforts, so gas and oil companies, for example, typically pay far less than retailers.
But if Mr. Trump intends to close loopholes — the heavy political lift in this maneuver — his administration has given no indication of what they are. Meanwhile, a straight cut of the magnitude he's suggesting would cost the treasury about $2 billion over a decade. Administration officials claim that increased economic activity will make up for the loss. We've heard that before, but we've never actually seen it happen.
Meanwhile, allowing pass-through entities to pay at the corporate rate sounds sensible — after all, why make mom and pop businesses pay far higher rates than multi-national conglomerates? But pass-through entities aren't just small businesses. They can be big law firms, physician practices or, yes, real estate empires. The benefits of such a cut would disproportionately accrue to these larger enterprises.
Supporters argue that such cuts will encourage investment and hiring, but the evidence suggests what they really lead to is tax avoidance. Five years ago, Kansas exempted pass-through income from state taxes, and research shows little impact on actual business activity but a substantial increase in people finding ways to report earnings as business rather than personal income. (Among the Sunflower State tax dodgers: Kansas Jayhawks basketball coach Bill Self, who funnels the bulk of the nearly $3 million he earns into an LLC.)
The plan isn't just about business taxes. Mr. Trump is also proposing an increase in the standard income tax deduction, reductions in individual income tax rates and an end to the alternative minimum tax. He is also supporting additional tax benefits to mitigate the cost of child care.
But what he is not doing is to lay out a credible plan to pay for it all. Depending on which estimate you look at and the specifics of what eventually emerges from the broad strokes the administration laid out, Mr. Trump's plans could increase the national debt by $6 trillion to nearly $10 million over a decade.
Which is where the political problems come in. It's not that the people who complained about the increase in the national debt under President Obama would necessarily display intellectual consistency on the matter. It's that in order to pass tax cuts in the Senate without facing a possible filibuster, they would have to be constructed in such a way as to not increase the deficit after a decade.
So, unless President Trump comes forward with some alternative math, he's going to either need to win some Democratic votes in the Senate, or he's going to have to actually make some hard choices. But the purpose of today's exercise wasn't to present a realistic or responsible plan. It was to dangle a shiny object in front of the public to distract attention from the fact that he has accomplished remarkably little as his 100-day-mark looms.