Trump to Tout Tax Plan’s Growth Benefits Amid Questions of Cost
(Bloomberg) -- Donald Trump will tout his plan to cut taxes for individuals and businesses on Thursday as a way to stimulate economic growth, but a question that has loomed over the proposal for roughly a year will remain a topic of debate among economists: By how much would Trump’s tax cuts reduce federal revenue?
Trump last year announced a series of tax cuts -- including reducing the top corporate income tax rate to 15 percent from 35 percent -- that came with a high price tag. Washington-area policy analysts, including the conservative-leaning Tax Foundation, said the plan would cost the U.S. Treasury roughly $10 trillion in revenue over a decade. This summer, Trump’s aides took that relatively detailed tax plan off the campaign’s website while a group of economic advisers suggested ways to trim its cost.
“Originally, we were a $10 trillion cost; now with revisions and dynamic scoring, the Tax Foundation has it down to $3 trillion,” said economist Stephen Moore, one of Trump’s advisers, in an interview Wednesday.
Alan Cole, a Tax Foundation economist, confirmed that the nonprofit group had analyzed what he called potential, unpublished tweaks to Trump’s plan and concluded that its cost was around $3 trillion over a decade. But he said the changes that the Tax Foundation reviewed weren’t final.
“We can’t vouch for any specific number until it corresponds to a specific plan, but certainly there are components of his plan that add up to that figure,” Cole said.
Trump has proposed cutting the tax rates for individuals across the board, taking the top tax rate to 33 percent -- down from 39.6 percent currently. In addition to cutting the 35 percent tax rate for major corporations, he’d institute a 15 percent tax rate for income from partnerships and limited liability companies -- so-called pass-through businesses. Those businesses aren’t taxed on their earnings; instead, they pass the profit through to their owners, who pay at their individual income-tax rates.
That change, which Trump has called a boon for small businesses, would benefit the highest earners the most. More than two-thirds of all pass-through income flows to the top 1 percent of tax filers, according to the Center for Budget and Policy Priorities, a left-leaning research group.
In assessing the cost of candidates’ tax plans, the Tax Foundation uses so-called dynamic scoring. That relatively new method is controversial among economists; it analyzes the cost of a policy proposal by predicting how it will affect employment, investment and spending over time. It differs from “static” scoring, a traditional method that assumes the policies won’t change the economic behavior of affected individuals and simply looks at their expected costs.
Because dynamic-scoring models anticipate that people will work, buy and invest more when their taxes are lower -- generating economic growth -- the models typically find that tax cuts cost less than static models predict.
“It’s not quite fair to say it’s voodoo, but it is a way to analyze tax changes that’s very new and very rough,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center. Trying to predict what the economy will be like years down the road is “pretty tough to do,” Gleckman said. “On top of it, you have tax proposals from candidates that are really pretty vague, so you’re making assumptions on top of assumptions.”
Matt Gardner, executive director of the left-leaning Institute on Taxation and Economic Policy, called dynamic scoring a “myopic analysis that’s done with a thumb on the scale. The premise is that tax cuts always help, and spending cuts never hurt.”
In September 2015, the Tax Foundation estimated that Trump’s original plan would cost nearly $12 trillion over a decade on a static basis, but $10.1 trillion on a dynamic basis. Meanwhile, the Tax Policy Center cited a 10-year revenue cost of $9.5 trillion “before accounting for added interest costs or considering macroeconomic feedback effects.”
Since then, Trump’s advisers have adjusted his plan, Moore said.
Solving an Equation
“We jiggered the tax brackets so we could get the revenue we needed,” he said. “It’s like solving an equation: ‘If we put this in, what do we get?’ It was trial and error.”
Originally, Trump had called for a top tax rate of 25 percent, with additional brackets of 20 and 10 percent. The initial proposal would have exempted roughly 70 million lower-income taxpayers from paying any federal income tax at all. It offered middle-class tax relief by almost quadrupling the standard deduction to $25,000 for individuals and $50,000 for married couples.
Last month, Trump announced new rates: 33 percent, 25 percent and 12 percent, though he didn’t specify the income brackets that those rates would attach to. Likewise, he didn’t say whether his standard-deduction proposal would change.
Moore said Trump’s top individual tax bracket would start at $200,000 a year for individuals and $400,000 a year for married couples. But Trump’s speech to the Economic Club of New York on Thursday isn’t focused on revealing new nuts-and-bolts details, he said. “The real focus on this speech is growth,” Moore said.
Last month, Moore said Trump’s tax plan -- along with his proposals to overhaul U.S. regulatory approaches and stimulate the domestic energy industry -- would result in 4 percent annual economic growth. On Tuesday, the campaign also said Trump’s plan to renegotiate international trade deals and overhaul immigration policy would contribute to economic growth that would offset “about two-thirds of the entire Trump tax reform program.”
Trump’s Democratic rival, Hillary Clinton, has proposed tax increases on the highest-earning taxpayers -- including a “millionaire’s tax” measure that would require those earning more than $1 million to pay a rate of at least 30 percent. She also proposes a 4 percent surtax on those who earn more than $5 million a year.
The Tax Foundation has estimated that her plan would raise federal revenue by $498 billion over a decade on a static basis. “However, the plan would end up collecting $191 billion over the next decade when accounting for decreased economic output in the long run,” according to the foundation’s analysis.