“The most important things for the middle class will be better economic performance and growth in wages,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative pro-growth advocacy group. “That’s a much more powerful force than any tax policy. From that perspective, this is a promising start. But it’s only a start.”
Representative Kevin Brady, Republican of Texas and the chairman of the House Ways and Means Committee, told me this week that he was determined to get a tax bill to the president by the end of the year.
“Is that ambitious?” asked Mr. Brady. “Absolutely. President Reagan’s reform took two and a half years. We’re trying to do it in one year.” But the economy and the public are desperately in need of tax reform, he added, and “we are continuing to work on the final design of the tax reform plan that we’ll have ready after the budget is complete.”
The biggest challenge for legislators is that corporate tax cuts are costly. The Tax Policy Center, in a preliminary analysis, calculated that reducing the corporate rate to 20 percent and eliminating the corporate alternative minimum tax would cost the Treasury nearly $2 trillion over the decade from 2018 to 2027.
Lowering the pass-through rate to 25 percent, the analysis shows, would add another $770 billion to the deficit.
And the White House has also proposed repealing the estate tax. The price tag for that change would be about $240 billion.
Closing various corporate loopholes would add back about $400 billion, the Tax Policy Center estimated. That leaves a net cost of about $2.6 trillion over the 10-year period.
The Trump administration has insisted that it is adamant about eliminating the state and local tax deduction, a move that would generates $1.3 trillion over those 10 years, and providing for immediate expensing of capital expenditures, which would cost about $220 billion over five years, but Republicans in Congress are already balking. So I’m ignoring those elements.
The Republican budget resolution accepts a 10-year revenue shortfall of $1.5 trillion, on the theory that faster economic growth will make up the difference. That’s a debatable proposition, but for purposes of this discussion, let’s accept it.
All of that leaves a 10-year gap of about $1.1 trillion between the Tax Policy Center’s projected net cost and the deficit built into the budget resolution.
So where should the money come from? Here are three proposals that could draw bipartisan support:
Create a new, higher tax bracket for the very rich.
The White House plan explicitly leaves open the possibility of a new, higher bracket for the rich. Depending on how high the marginal tax rate is, it could simultaneously raise substantial revenue and help minimize the claim that the plan is tilted toward the wealthy.
This seems reasonable, given that the rich benefit disproportionately from cuts to corporate tax rates, since they are overwhelmingly the owners of the companies that would get a windfall from the cuts. (They have already seen the value of their stocks rise.)
Among others, the former White House adviser Stephen K. Bannon is advocating a new, higher bracket, telling colleagues he wanted a top tax rate “with a 4 in front of it,” according to Breitbart News.
The current top marginal income tax rate is 39.6 percent.
Neither the Tax Policy Center nor the Tax Foundation has analyzed the impact of a new top bracket, so I have done some rough calculations.
A top bracket of 44 percent for the top 0.1 percent of taxpayers — those with adjusted gross incomes of more than $2.1 million in 2014 — would generate about $300 billion over 10 years.
There are only about 140,000 of these extremely high earners, but they already put in about 20 percent of the revenue that comes from the federal individual income tax.
If Congress wants to take the new bracket down to the top 1 percent — those with adjusted gross incomes of more than $466,000 in 2014 — doing so would generate about $600 billion in additional revenue. (The top 1 percent provide about 40 percent of federal income tax revenue.)
The large and vocal nonprofit sector would probably cheer a higher tax bracket for the ultrarich, because it would make the tax benefits of their charitable deductions more valuable. The wealthy already account for a disproportionate share of charitable giving: the top 1 percent accounted for 37 percent of deductions for charitable contributions in 2014.
But raising rates for the highest earners would raise issues of fairness, since it would further penalize earned income, while leaving passive income like capital gains untouched. A higher tax bracket for the highest earners would have little impact on Mr. Trump, since he has relatively little earned income, as opposed to pass-through income and capital gains.
Still, to help pay for pro-growth corporate tax cuts, “I would have no problem raising capital-gains rates or creating a new bracket for the rich, or both,” Mr. Holtz-Eakin said.
Tax capital gains at death.
The appreciation of capital assets is already taxed at an extremely favorable rate compared to labor. That’s why the rich pay such a low effective tax rate no matter what their marginal tax bracket. Various justifications for lower capital-gains rates have been proffered over the years, none of them self-evident. But even conceding the wisdom of lower capital-gains rates, why should they never be taxed at all, even as they are passed from generation to generation?
The argument for taxing such gains seems even more compelling given the proposed elimination of the estate tax, which at least captures some capital gains among the wealthiest people.
“To take away the backstop of the estate tax without a tax on capital gains at death is crazy,” Mr. Rosenthal said.
During the campaign, Mr. Trump proposed a plan to tax capital gains in excess of $10 million at death. That would avoid shifting the burden from the very wealthy to the less affluent. Congress could even exempt family-owned farms and small businesses. (There aren’t that many valued at more than $10 million.)
The Congressional Budget Office estimates that the exclusion of capital gains at death would cost the Treasury $644 billion from 2014 to 2023. How much of that could be recaptured depends on where the threshold is set (it certainly could be lower or even higher than the $10 million). Let’s assume about half, or $320 billion.
The White House plan is silent on the issue. “In this instance, I’d say, ‘Let Trump be Trump,” Mr. Rosenthal said.
Curb the deduction for corporate interest expense.
As the conservative-leaning Tax Foundation points out in a paper by Alan Cole, the corporate interest deduction “hemorrhages tax revenue, distorts business decisions and potentially even contributes to financial crises.”
Prominent Republicans have made similar arguments. Senator Marco Rubio, Republican of Florida, has proposed eliminating the interest deduction, along with the corporate tax on interest income. A House Republican plan put forward in June 2016 also eliminated the corporate interest deduction, while lowering the tax rate on interest income.
Both approaches would raise substantial revenue, although it’s hard to calculate just how much. The Tax Foundation estimates that the corporate interest deduction would cost the Treasury $1.2 trillion over 10 years. A rough estimate for what could be saved would be $600 billion.
Of course nothing about tax reform is easy. Real estate investors, Mr. Trump among them, love the interest deduction. So do banks and other lenders.
The White House plan is silent on the issue.
The bottom line: Potential revenue from the three suggestions above adds up to $1.22 trillion. (Extending the top bracket to the upper 1 percent would raise another $300 million.) Voilà: the $1.1 trillion budget hole would be closed, and then some.