WWS Reacts: Trump’s Tax Cut Plan

Apr 28 2017
By B. Rose Kelly
Source Woodrow Wilson School

President Donald Trump announced an outline of his new tax plan this week, proposing sharp reductions in individual and business income tax rates and a new tax code that could significantly benefit the wealthy.

Listed in a series of bullet points, the plan proposes lowering the business tax rate from 35 to 15 percent. For individuals, Trump proposed doubling the standard deduction, which would likely ease the tax burden on some Americans.

We discussed the Trump Tax Plan with esteemed economist Alan Blinder, Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University’s Woodrow Wilson School of Public and International Affairs.

Blinder served on President Bill Clinton’s Council of Economic Advisers (1993-1994) and as vice chairman of the Board of Governors of the Federal Reserve System (1994-1996).

Q. Who are the biggest winners and losers under the Trump Tax Plan? Do you agree with Neil Irwin’s assessment in The Upshot that it primarily benefits the wealthiest Americans?

Blinder: I do agree with Irwin. The very rich are huge winners, especially if they derive most of their income from “small businesses” and expect to leave a large estate — as the Trump family does. The main losers — from what we've been told so far, which is not much — are residents of high-tax states like New Jersey, who will lose their tax deduction for state and local taxes.

Q. Some say Trump’s plan could reduce federal revenue by $6.2 trillion over a decade. Do you predict a large increase in the national debt or reductions in federal spending? If the latter, which programs will be the first to get cut?

Blinder: Well, the $6.2 trillion figure is someone's rough estimate. But no one can make a serious estimate from the sketchy information the White House has provided. So we're playing a guessing game. My own guess is that the bill that eventually passes Congress will lose a huge amount of net revenue, but less than $6.2 trillion. The Republicans will, I suppose, propose large cuts in entitlements for the poor, such as Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp Program) and Medicaid. They always do. But the Democrats will fight those cuts, and who knows what will happen? Either way, the national debt will go up faster because of the tax bill.

Q. Trump proposes eliminating the Alternative Minimum Tax (AMT), which could be a huge boon to wealthier taxpayers (and might have saved him millions in 2005 according to leaked tax documents.) What’s your reaction to this? And what are the costs are associated with eliminating AMT?

Blinder: The AMT originally came into the code to catch people who take advantage of so many loopholes that their tax bills get reduced almost to zero — sort of like the Trump family. Over the years, congressional meddling and lack of indexing to the Consumer Price Index (which measures the average change over time in prices paid by consumers for goods and services) have made it a mess that applies to far too many people. It would be great to move to a “clean” AMT (no loopholes) that applies, say, only to adjusted gross incomes over $1 million or $2 million. Abolishing it entirely would be a boon to Trump-class taxpayers.

Q. It is evident how tax cuts will affect corporations and the wealthy, but how will the Trump Tax Plan affect middle-class Americans?

Blinder: That will vary by family, and the Trump administration has not yet provided enough detail to tell. (They don't know themselves!) But doubling the standard deduction — if it survives to the ultimate bill — will give a meaningful tax cut to many middle-class families and also simplify the filing. It's the “good part” of the Trump proposal.

Q. Overall, there are still many details that remain to be worked out. Which do you anticipate being the stickiest?

Blinder: Oh, my. The list is potentially endless. I'd guess — but this is a long list — the congressional wrangling over which deductions and exemptions to end. The White House says “almost all” of them. But I'll be shocked if Congress buys into that. In addition, Secretary of the Treasury Steven Mnuchin says they'll try to close the gigantic loophole they propose opening by taxing pass-through entities — sole proprietorships, partnerships, LLCs and other corporations that are not subject to income tax  at only 15 percent. I can't imagine how they'll do that.

Q. Which elements of this proposal could gain wide support by Americans?

Blinder: The aforementioned doubling of the standard deduction. Maybe also the end of the estate tax. The latter is a big puzzle of long standing. Only a handful of Americans will ever pay it, but the tax is unpopular nonetheless.

Q. What does the study of economics tell us about the argument that these tax cuts would boost economic growth?

Blinder: Pretty simple: that the magical thinking behind supply-side economics is nonsense. This tax cut will not pay for itself, as Mr. Mnuchin claims.

WWS Reacts is a series of interviews with Woodrow Wilson School experts addressing current events.