In a Wall Street Journal commentary on September 28, Donald Trump provided a relatively brief outline of his plan to reform the tax code. The WSJ's editorial board review of the Trump plan can be found here.
[Trump's truly awful mercantilist trade views deserve greater discussion in a future blog post.]
Trump's plan has a few attractive elements but overall still rates as underwhelming.
The best parts of Trump's plan are the four personal income tax brackets (0%, 10%, 20%, 25%) that hit the top rate for a married couple earning greater than $300,000. A low flat tax of 15% that Steve Forbes has proposed in the past or a consumption tax would be preferable simply because it doesn't punish success with progressively higher rates. Relative to the thresholds proposed by Jeb Bush, Trump's plan is superior. Bush's max rate of 28% begins at only $141,200 for a married couple.
Like Bush, Trump eliminates the death tax, the marriage penalty, and the ongoing absurdity complex alternative minimum tax (AMT).
Trump proposes eliminating deductions and loopholes but fails to get into the specifics in any meaningful way. He does say that the "middle class" will get to keep most of their deductions while those for the wealthiest Americans will be eliminated. Apparently this means the Trump plan will continue to subsidize certain behaviors by allowing deductions on mortgage interest and charitable giving to remain. Social engineering via the tax code is frustratingly difficult to eliminate.
Trump proposes lowering the corporate tax rate to 15%, which is lower than the 20% in the Bush plan. Included is a repatriation rate of 10% for cash returned to the U.S. currently held overseas which is nothing more than a gimmick. The 15% rate will certainly help raise the attractiveness of the U.S. as a destination for investment capital after cuts in recent years by other countries in the OECD rendered the U.S. among the least competitive among the developed nations of the world.
As for the all-important capital gains tax, Trump inexplicably doesn't mention it at all in his commentary but details on his website indicate he wants it lowered to 20% for those taxpayers in the highest marginal bracket. This is still disappointing. Given the critical importance of capital investment to the creation of jobs, the optimal capital gains tax rate is zero.
He also seeks to treat "carried interest" generated by successful hedge fund and private equity investors as ordinary income. Carried interest income is created only when these managers are able to successfully invest capital on behalf of their investors. Like the capital gains tax, in a sane world carried interest wouldn't be taxed at all. We want Wall Street's best and brightest allocating scarce capital in pursuit of wealth-enhancing investment opportunities.
Trump does imply that the plan will be "revenue neutral" and not add to the national debt. He therefore keeps alive the tradition of candidates highlighting that their plans ensure the government will not have any less to spend going forward than it does now, as if that is some grand achievement. The true burden of government is the total amount of resources it is able to commandeer from the market-disciplined private sector. As supply-siders, we want the government to have less in the way of those resources to waste.
As I mentioned in my recent review of Bush's plan, what the the U.S. tax code needs now after a long period of subpar economic growth is anything but tinkering around the edges. It calls for nothing short of bold action. Trump's plan simply doesn't get the job done. Sure, it's better than the current Internal Revenue Code, but that's admittedly a very low bar.
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