Tax "reform" for the rich: Trump’s plan abandons his working-class supporters

President Donald Trump heralded his new tax plan as relief for the middle class, revenue-neutral and a “middle-class miracle.”

Yet the proposal, announced on Sept. 27, does none of these things. Instead, it is a scam not fit to become law of the land because it will enrich the rich, explode the deficit and hurt many middle-class Americans. This may sound like strong language, particularly for an economist, but I’m going to show you why this is no exaggeration.

While some details remain up in the air, Trump has proposed three main changes to our tax code. He wants to repeal the estate tax, simplify the individual tax code and slash the rates corporations pay. Let’s consider each in turn.

Killing the ‘death tax’

The estate tax currently exempts the first US$5.5 million of wealth for individuals and $11 million for married couples. It is paid by only the wealthiest 0.2 percent of Americans, or fewer than 15,000 people in 2016.

While some dub it the “death tax” resulting in “double taxation,” about 55 percent of the wealth subject to it has never before been taxed. It is assets, like stocks and homes, that have appreciated in value but not sold.

While Trump falsely claimed its repeal will “protect millions of small businesses and the American farmer,” the reality is that these small firms do not have to pay the estate tax. Eliminating it would allow a small fraction of very wealthy Americans to accumulate even more wealth, widening the chasm between rich and poor.

‘Relief’ for the middle class

A second key element of the plan overhauls how individuals pay taxes by shrinking the number of tax brackets, doubling the standard deduction and eliminating personal exemptions. This is the part that is supposed to provide tax relief for the middle class.

Currently, the first $10,400 a single person earns goes tax-free (the standard deduction plus a personal exemption). For a married couple, it’s $20,800, plus $4,050 for each child.

By increasing the standard deduction and eliminating exemptions, Trump’s proposal would increase the earnings that escape taxation to $12,000 for single people and $24,000 for couples (with or without kids). After that the new tax brackets would kick in, starting at 12 percent (up from the current 10 percent).

But what Trump giveth with one hand, he taketh away with the other. That’s because any gains the middle class reaps from a higher standard deduction will be minuscule at best because of the loss of personal exemptions and the elimination of certain itemized deductions like state and local taxes and medical expenses. Many middle-class households will end up being worse off under this new tax regime.

With some details, like the mortgage deduction and charitable contributions, still unknown, we can’t be certain of all the winners and losers — except one: The rich will be much better off because the top tax rate will be cut from 39.6 percent to 35 percent.

Corporate cuts

The proposal’s third key component is a big tax cut for corporations to 20 percent from 35 percent. While Trump claims it primarily will benefit workers and create jobs, I see it as another bonanza for the wealthy.

Publicly traded companies don’t really pay income taxes. Their shareholders, consumers and workers do. And shareholders foot more than three-quarters of the bill. That means if taxes are reduced, companies will make more money and pass most of that along to shareholders, who will benefit from bigger dividends and higher share prices.

This will primarily enrich the richest 1 percent because they own half of all corporate stock. Senior executives — also among the 1 percent — will be big winners as well because their pay and bonuses are usually tied to the value of their company’s stock.

Trump has tried to sell this tax cut by claiming U.S. corporate rates are the highest in the world, making the U.S. less competitive. While it is true that the statutory rates on corporate profits are greater in the U.S. than in other G-20 nations, effective rates in the U.S. are not the highest and not that different from these other developed countries .

Paying for it

Estimates of the cost of the Trump tax cuts vary, but one reliable estimate puts it at $2.7 trillion over 10 years, or $270 billion a year.

Trump administration officials claim the tax cuts will pay for themselves by generating economic growth. Neither history nor math bears this out.

Historically, large tax cuts have failed to produce the needed and promised growth. This is true of individual states like Kansas, which rescinded several tax cuts after they failed to stimulate economic growth and created big deficits. It is also true of President Reagan’s 1981 tax cut, which, as one of its key architects noted, failed to spur faster economic growth than the U.S. experienced during the 1970s.

Furthermore, even if Trump’s tax cuts did manage to achieve the 3 percent growth his treasury secretary is currently touting, this would not nearly be enough to offset the cost of the tax cuts. By my calculations, growth would have to be double that to result in enough additional revenue to offset the Trump tax cuts.

Given that economic growth at its best sustained level over the past 75 years averaged only 4 percent (from the 1950s to the 1970s), getting to 6 percent (from the current 2 percent) is unlikely.

That leaves spending cuts and borrowing to pay for a large tax giveaway to the wealthy — both of which would come at the expense of the middle class, a group Trump promised to protect.

If Trump were to choose to cut spending to pay for some or all of it, he would inevitably have to take the money from programs like subsidized student loans and children’s health insurance programs that benefit middle-class Americans. And if he were to borrow the money, the increased debt levels would likely drive up borrowing costs on everything from car loans to mortgages, which would also hurt the middle class.

Just as a few brave Republicans prevented the repeal of the Affordable Care Act, will some say no to this reverse Robin Hood tax reform?

Steven Pressman, Professor of Economics, Colorado State University