What Trump and the G.O.P. Can Agree On: Tax Cuts for the Rich
What Trump and the G.O.P. Can Agree On: Tax Cuts for the Rich
In some important ways, the House Republicans’ new plan to overhaul the tax code has more in common with proposals from the candidates who lost their party’s presidential nomination than those from Donald J. Trump, the one poised to win it.
Like Senator Ted Cruz of Texas, the Republicans boast that most Americans will be able to file their taxes on a postcard.
Like the former Florida governor Jeb Bush, they would eliminate deductions for interest payments for businesses and allow them to immediately write off all capital investments.
Like Senator Marco Rubio of Florida, they would no longer tax a company’s foreign profits.
But most significant, the blueprint, shepherded by Paul D. Ryan of Wisconsin, the House speaker, embraces a transformational shift promoted by both Mr. Cruz and Mr. Rubio, but not Mr. Trump: a move away from taxing income to a system that basically taxes consumption.
“What Ryan and the House Republicans are doing is staking out an entirely different approach to taxes,” said Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center in Washington.
Despite their conceptual differences, however, there is a crucial feature that Mr. Trump’s plan and the House Republicans’ plan share: The biggest tax cuts are reserved for the wealthiest.
“Relative to the current system, the plans are pulling in the same general direction, reducing taxation on capital gains and high-income households,” said William Gale, a co-director of the Tax Policy Center and a former economic adviser to President George H. W. Bush.
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Beyond sharply cutting income tax rates across the board, both Mr. Trump and the House Republicans would eliminate the estate tax (which currently applies to only about 5,300 of the richest families); end the 3.8 percent surtax on high earners’ investment income, which helps pay for health coverage for lower-income Americans; and scrap the alternative minimum tax, which is aimed at making it harder for the affluent to take advantage of various tax breaks.
But they reach those goals by different paths. While the Trump plan stays squarely within the traditional framework of an income tax, the Ryan plan takes a giant step toward taxing what people spend.
Alan Viard, a tax expert at the conservative American Enterprise Institute and a proponent of consumption taxes, explained the difference. The “Trump plan has a bigger revenue loss and more harmful effects on the budget outlook,” he said, while “the Ryan plan is more revolutionary from the standpoint of tax policy.”
The best-known version of a consumption tax is the value added tax, or V.A.T., which functions like a national sales tax.
Such taxes have long been popular among some economists, who argue that they encourage people to save for tomorrow, rather than spend today, and help foster more investment that leads to longer-term growth.
But skeptics point out that unlike the rich, people on the lower end of the income ladder must spend most, if not all, of their earnings — on things like housing, food, cellphones, doctors, toothpaste, bus fare, jeans and haircuts — and have little left over to save. Taxing consumption means the burden inevitably falls more heavily on them.
From this vantage point, a progressive income tax based on the ability to pay is the most practical way to ensure that the wealthy contribute their fair share to financing the government, particularly when wealth inequality has widened to the greatest levels since the Gilded Age.
Supporters of a progressive income tax argue that it is fairer in another way because it taxes earnings from capital as well as labor (even if sometimes at a different rate). Workers who earn their money in the form of wages or salaries should not pay a larger share of their income, they say, than taxpayers who live off their investments and tend to be among the wealthiest Americans. Nearly 70 percent of capital gains benefits go to the top 1 percent.
Those proponents also note that there is little evidence that lowering taxes on the wealthy leads to significantly stronger economic growth. There is no guarantee that the rich will not use their extra money to buy, say, a multimillion-dollar Picasso to hang in their living room or finance a company in China rather than plow the money into American businesses and their workers.
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Senator Ted Cruz has promoted a shift toward taxing consumption rather than income.CreditZach Gibson for The New York Times
Like Mr. Rubio and Mr. Cruz, the House majority has tried — as the song advises — to accentuate the positives and eliminate the negatives, by mixing and matching elements of both approaches.
Individuals would continue to pay taxes on their income at mildly progressive rates. Instead of imposing a regressive tax on consumers at the checkout counter, however, the government would collect that money after it was spent, from businesses.
Businesses would then be allowed to deduct all their expenses and investments right away, rather than depreciating them over time. But it would mean an end to the deduction for interest paid on loans, which can often favor industries that depend heavily on debt financing — like real estate, Mr. Trump’s own business.
“It’s a combination of a consumption tax on the business side and an income tax,” said Roberton Williams, a fellow at the Tax Policy Center.
Both Mr. Ryan and Mr. Trump have indicated a willingness to compromise on details, but as Mr. Ryan told C-Span, “On the critical aspects of this agenda, on the foundations of it and the basic principles, we are in agreement on these things.”
Mr. Trump’s campaign team did not respond to repeated requests for comment.
With only sketchy details, predicting how either plan would affect the economy and the federal budget is difficult. Both Mr. Trump and House Republicans contend that explosive growth unleashed by their proposals would make up for revenue losses.
The conservative Tax Foundation estimated that the Ryan plan would cost $2.4 trillion in the first decade, without accounting for growth.
As for the Trump plan, the Tax Policy Center has calculated that it would drain a staggering $9.5 trillion from the Treasury over 10 years. The top 1 percent of taxpayers would save about $275,000, on average, or 17.5 percent of their after-tax income, it estimated. For middle-income families, the cut amounts to about $2,700, a 4.9 percent savings.
And so while Mr. Trump’s proposals strike a more populist note, claiming to eradicate sweetheart deals for the rich, in reality both Republican plans offer the wealthy even better breaks than they get now.
Take, for example, Mr. Trump’s proposed elimination of what’s known as the carried interest loophole, which has enabled private equity and hedge fund titans to save billions of dollars. They are allowed to classify what are essentially ordinary earnings — taxed at over 40 percent for the highest incomes — as investment profits, which are subject to a rate of 23.8 percent.
But as Mr. Rosenthal of the Tax Policy Center sees it, “Trump is closing one carried interest loophole and opening another.”
Many of those money managers could end up paying less than they do now — just 15 percent — by simply reclassifying their earnings as income from pass-through businesses or partnerships.
That loophole would also get bigger under the Ryan plan, because the tax rate on capital gains would be reduced.
When it comes to companies parking their overseas profits outside the United States, Mr. Ryan and Mr. Trump seem to stake out conflicting positions. The Ryan plan eliminates taxes on foreign earnings altogether, and instead taxes businesses on the basis of where their goods and services were sold.
By contrast, Mr. Trump has promised a crackdown, forcing multinationals to pay United States taxes every year.
As it turns out, the get-tough approach would not necessarily matter much. Because Mr. Trump promises to cut the corporate rate and allow credits for foreign taxes paid, many multinationals could end up owing nothing.
“Superficially, Trump is at the opposite end of the spectrum from the House Republicans” on this issue, said Mr. Viard of the American Enterprise Institute. “But in practice, not that much.”
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