How Trump can fix Trumpism

Shikha Dalmia likes the proposed (and detail-free) Trump tax cut proposal for an important reason:

President Donald Trump has proposed a “big league” (or is it “bigly”?) tax reform plan that’s not perfect — but it is just about as good as one can expect. It’s best part is that by spurring growth, it will undercut his own ethno-nationalistic agenda, which is why, if progressives had any sense, a big “if”, they’d support it instead of demagoguing it! …

Trump noted that there were two principles—both noble—guiding his plan: Simplifying the tax code and lowering the tax burden on individuals and corporations.

Simplifying the tax code:

The most conspicuous mark of his seriousness of this is what he didn’t do, namely, embrace the Border Adjustment Tax loopiness of House Republicans that he himself had initially encouraged. They wanted to offset revenue losses from tax cuts by taxing imports to the tune of $1.2 trillion over the next decade from countries with higher tariffs than the United States. But this was a poison pill that, apart from being horrendously protectionist (that a free-trader like Speaker Paul Ryan has surely earned a lot of bad karma for embracing), would have infinitely complicated the tax code for American businesses that have supply chains that span the globe, while sticking it to American consumers who’d face higher prices.

But what he wants to do to simplify taxes for individual filers is good too. Broadly, he wants to reduce the tax brackets for individuals from seven to three and eliminate tax breaks and deductions except for those for charity and home ownership. To mitigate the tax increases that some might face due to this, he’ll double the personal tax deductions. And as a special [“bless their heart,” in the words of Southern women] to high-tax liberal states such as California and New York that didn’t vote for him, he’s proposing to end the deductions for local and state taxes. Most of these are steps in the direction of a flatter tax code that’ll one day make the world an infinitely better place by ridding it of tax accountants and lawyers. But the other reason to applaud it is that a less kinky tax code means a less distorted economy.

Lowering the tax burden on individuals:

His ideas to accomplish this goal are decent but not flawless.

He wants to eliminate the liberal absurdity that is the Alternative Minimum Tax. When originally enacted in the mid-1960s, it was meant to bring to heel about a 150 super-rich families who were using loopholes and deductions to avoid paying any taxes at all. The AMT required everyone to calculate their taxes at a flat rate without breaks and at the regular rate with breaks and pay whichever was higher. But its been increasingly snagging folks who are not its targets, even after it was modestly indexed for inflation four years ago.

The bigger deal, however, is that he would compress the current 10%, 15%, 25%, 28%, 33%, 35% and 39.6% tax brackets to 10%, 25% and 35%. Clearly, the highest tax-brackets will get a nifty cut (especially since Trump will also, much to the dismay of liberals, scrap the death tax) and the lowest will be held harmless. As for the in-between folks, it will be important to pick the right income at which to position it so that a vast majority—if not nearly all—see declines in their tax bill, which will make it politically easier to push through.

Now, it is true that unlike the corporate tax cuts, reductions in individual tax rates won’t necessarily spur growth (although they could remove the disincentives to work and boost productivity) and hence might add to the deficit. But Cato Institute’s Chris Edwards notes that that can be dealt with by eliminating deductions and credits, which is why Trump’s proposal to offer “relief for families with child and dependent expenses” is among the most disappointing aspect of his reform package.

Trump doesn’t explicitly say what form this relief would take, but he talked about child-care tax credits during his campaign. These will surely give reformocons wet dreams. But such credits are unfair to folks who don’t have children. And they unwisely pile another entitlement on top of the existing entitlement state, making its reform more elusive.

Corporate tax reform:

That flaw, however, doesn’t negate the crowning achievement that is his corporate tax reform proposal, the centerpiece of his package.

Trump would slash corporate tax rates from 35 percent (39 percent when state taxes are included) to 15 percent and end America’s system of worldwide taxation that taxes companies even on their foreign income. Liberals have not yet figured out that taxing worldwide income discourages multinational companies from domiciling in America and loses, instead of gains, Uncle Sam revenues. Hence it is unlikely that they will do anything but play spoilsport on this measure. But there are quite a few liberals who have grokked that America’s corporate tax rates undermine America’s global competitiveness because these taxes are the highest in the developed world. The UK’s current rate is 20 percent going down to 17 percent, Denmark’s 24.5 percent, and Ireland’s an inspiring 12.5 percent.

This disparity shamed even President Barack Obama into proposing a 28 percent rate, something that New York’s Democratic Senator Chuck Schumer was in principle on board with. Even Harlem Democrat Rep. Charlie Rangel, who is just about as left as they get before turning into Bernie Sanders, recommended slashing this rate to 30.5 percent.

But what’ll give Democrats (and some Republican deficit hawks) conniptions, besides the size of this cut, is that Trump has shown no interest in making it revenue-neutral by raising taxes elsewhere or cutting spending. These worries are not baseless but they are overblown—and misplaced, at least at the moment.

The Treasury Secretary Steve Mnuchin may be exaggerating that, “the tax plan will pay for itself with economic growth.” But so is the Tax Policy Center, a liberal-leaning outfit, that estimates that the 15 percent rate would lead to a $2.4 trillion loss in revenue for Uncle Sam over 10 years.

Cato’s Edwards’ notes that the U.S. corporate tax rates are in the “strong Laffer zone.” (The Laffer curve, named after Arthur Laffer, the economist who formulated it, shows that up to a point, tax cuts lead to an increase in revenues by fueling business expansion, broadening the tax base and attracting more foreign investments.) Studies examining OECD countries have shown that corporate tax rates above 26 percent reduce government revenues. The U.S. corporate tax rate is 14 percentage points above that rate, which is why America has a lot of room to cut. Indeed, corporate revenues from Canada’s 15 percent central corporate tax rate right now constitute 2.1 percent of the GDP (which is a bit higher than what it was when those rates were twice as high in the 1980s) and America’s 35 percent rate 1.7 percent of the GDP, estimates Edwards.

A 15 percent rate in America may result in some revenue losses despite growth effects. That’s not ideal when America’s annual deficit is approaching $590 billion and its total debt, not counting unfunded entitlement liabilities, already exceeds its total GDP.

But America’s Number One challenge right now is boosting its sluggish economy that grew a lame 1.6 percent last year, its weakest performance in five years, and lifting stagnant wages, that are growing at a far lower rate than before the Great Recession. And tax cuts that stop penalizing business growth and expansion are the best known tool to man to fix that.

But this is not just a matter of improving America lives, but also American politics. The appeal of zero sum ethno-nationalism becomes infinitely greater when a moribund economy turns politics into a zero-sum game of dividing the spoils. Trump won because he found a populist narrative that masterfully combined left-wing class warfare with right-wing nativism. He told American middleclass voters that they were getting screwed, on the one hand, by a corrupt elite hell bent on keeping all the gains for itself and, on the other, immigrants and foreigners who were threatening their livelihoods and lifestyle.

Trump may not realize it but the appeal of such a zero-sum message goes away in a robust economy that releases the animal spirits of Americans. Economic growth is great not only because it allows consumers to trade their iPhone 6 for an iPhone 7 but because it makes every sectarian divide easier to manage. It will also inevitably require more workers, taking the wind out of Trump’s anti-immigrant bashing.

Trump, then, may himself be the best cure for Trumpism. That’s why, unless liberals have better ideas for reviving the economy (and, puhlese, Keynesianism that Obama already tried and spectacularly failed doesn’t count), they should desist from using ad hominem attacks about Trump’s failure to release his tax returns to derail his tax reform. And Republicans who want to tame the federal deficit would do the country a far bigger favor by: ensuring that Trump’s infrastructure package is privately funded, curbing defense spending and reforming Medicare and Social Security. Defense, after all, consumes 16 percent of the federal budget and Medicare-Social Security more than half.

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