The Offsets
According to the Trump campaign website, the Trump tax cuts are “fully paid for” through three main revenue generators: “reducing or eliminating most deductions and loopholes available to the very rich”; a “one-time deemed repatriation of corporate cash held overseas at a significantly discounted 10 percent tax rate, followed by an end to the deferral of taxes on corporate income earned abroad”; and “[r]educing or eliminating corporate loopholes that cater to special interests, as well as deductions made unnecessary or redundant by the new lower tax rate on corporations and business income.”
In addition, Trump’s plan said it would “phase in a reasonable cap on the deductibility of business interest expenses.”
Notably, however, Trump said he would preserve charitable giving and mortgage interest deductions — two of the largest income tax deductions — which account for about 10 percent of all tax expenditures.
The mortgage interest deduction is expected to reduce revenues to the Treasury by nearly $70 billion in 2015, and by more than $1 trillion over the next 10 years, while revenues lost to charitable contribution deductions amount to about $54 billion in 2015, or about $745 billion over the next 10 years, according to the White House Office of Management and Budget. In all, tax expenditures cost the government $1.2 trillion in 2014.
Trump also plans to keep the earned income tax credit, which is expected to cause a revenue hit of $63 billion this year, and the child tax credit, which reduces revenue by about $46 billion.
But even if all of the exclusions, deductions and tax preferences were cut, Cole said, “it’s not possible to get there [to revenue neutral].”
One offset that will not raise much new revenue is one that Trump repeatedly has touted on the campaign trail: taxing “carried interest” earned by hedge fund managers’ portfolio profits as ordinary income rather than capital gains.
Capital gains are taxed at a lower maximum rate than most ordinary income, which carries a top tax rate of 39.6 percent. “The hedge fund guys are getting away with murder,” Trump said on CBS’ “Face the Nation” on Aug. 23.
When Obama proposed taxing carried interest as ordinary income as part of his 2016 budget proposal, the Joint Committee on Taxation estimated it would bring in an additional $15.6 billion over the next 10 years. But Trump is proposing a top rate of 25 percent. So under Trump’s plan, carried interest would be taxed at a top rate of 25 percent, rather than the current 23.8 percent. That’s not much of an increase.
In fact, most hedge fund managers may actually see an overall tax cut. Vox analyzed Bush’s tax plan, which similarly proposed to tax carried interest as ordinary income, but at a top rate of 28 percent. Vox concluded that most hedge fund managers would see an overall tax decrease because other parts of their income derived from a percentage of the value of their portfolios — currently taxed as ordinary income up to a top rate of 39.6 percent — would only be taxed at a top rate of 28 percent. That part of their income would be taxed at an even lower top rate — 25 percent — under Trump’s plan.
In other words, the so-called carried interest loophole that Trump has talked so much about repealing is not going to offset revenue losses much at all.
And because Trump would cut the pass-through business income rate by more than half, to 15 percent, it is that much harder for economic growth to make up for lost revenue, Cole said.
Williams, the Sol Price fellow at the Tax Policy Center, agrees the Trump plan could not be revenue neutral, as touted.
“On the face of it, it is a tax plan that is going to lose money [revenue to the Treasury],” he said.”The bottom line is that if you are going to do it by eliminating tax preferences, there aren’t enough preferences to make up for it.”
Take this example, Williams said: If someone makes $1.5 million in income, they are taxed at 39.6 percent on that last million. Cutting the rate to 25 percent means about $150,000 less in revenue to the Treasury. That person would have to earn $600,000 more per year to make up that lost revenue.
“There’s a lot of money disappearing,” Williams said. “There isn’t that much in tax breaks that he could take away.” Since Trump has said he would leave mortgage interest and charitable contributions alone, “we’re pretty much down to state and local tax deductions,” Williams said. There’s not enough there, he said, to boost your taxable income enough to offset the losses in tax revenue.
As a result, Williams said, it would require “substantial budget cuts” to make up for lost revenues.
Budget Cuts
Trump said during his press conference and in the Wall Street Journal op-ed that he would cut spending. But Trump was short on details about how he would make such cuts, promising “disciplined budget management and elimination of waste, fraud and abuse” to achieve a balanced budget with the new tax plan.
Trump claimed there’s so much waste in the federal budget, he could make the necessary cuts without actually “losing anything” by way of services.
Trump referred specifically to “a 19-cent washer and it cost $900-and-some-odd thousand to send it from here to there.” It’s true that a South Carolina parts supplier fraudulently collected $998,798 from the Pentagon for sending two 19-cent washers to an Army base in Texas. The company and one of its owners were convicted of conspiracy to commit wire fraud and conspiracy to launder money.
Trump also cited the example of “hammers that cost $800 that you can buy in a store for a tiny amount of money” — a reference to a scandal over Pentagon spending on hammers in the early 1980s — and “a million dollars” spent on a soccer field at Guantanamo Bay (it was actually $744,000).
“We will run this country properly,” Trump said in his news conference. “There is so much money to be saved. We are reducing taxes, but at the same time if I win, if I become president, we will be able to cut so much money and have a better country. We won’t be losing anything other than we will be balancing budgets and getting them where they should be.”
As we have said, tax experts say Trump’s plan isn’t revenue neutral, so the promise to balance the budget would require even more spending cuts than under the current tax system. The Congressional Budget Office projects a $426 billion budget deficit in 2015.
Of course, there is fraud, waste and errors in any large organization, especially one as large as the federal government. According to the Government Accountability Office, the federal government in fiscal year 2014 made $124.7 billion in improper payments, up from $105.8 billion in fiscal 2013. But even if such errors were eliminated that would not be enough to balance the budget, let alone make up for lost tax revenues.
We take no position on the merits of Trump’s tax plan. But Trump has failed to provide evidence that he can keep his promise to cut taxes at the level he has proposed and raise enough new revenue elsewhere to make his plan revenue neutral.
— Robert Farley
