Trump’s new tax brackets aren’t a magic bullet for cost savings
By Matt Jensen
I am an open source contributor to several economic modeling tools and a core contributor to Tax-Calculator, a model for calculating individual and payroll tax liabilities in the US tax system. When Donald Trump announced on Monday that he is changing the tax rate schedule in his tax proposal, the first thing I wanted to know was how far it would take him toward his advisers’ target for reducing the sizable revenue loss of his original plan. I turned to the Tax-Calculator and found that he has a lot more work to do to meet the target.
Here’s what he said on Monday: “we will work with House Republicans on this plan, using the same brackets they have proposed: 12, 25 and 33 percent.” Under his original plan, the rates would have been 10, 20, and 25%. Additionally, under his original plan, many more taxpayers would have faced a zero percent rate than under current law — equivalent to an expanded standard deduction. On Monday, Trump maintained that, “for many American workers, their tax rate will be zero.”
The original plan’s sticker price was a whopper: $10.1 trillion by the Tax Foundation’s reckoning and $9.5 trillion by the Tax Policy Center’s. According to Steven Moore, one of Trump’s economic advisers, the target price for the new plan is $3 trillion. These estimates should be taken with a grain of salt, though, because Trump never offered more than a rough outline of his original plan and there is sparse documentation of the estimates themselves.
Still, if we take those calculations at face value, then the gap between the old score and the new target is roughly $7 trillion.
The question that I’m curious about is how far the rate changes — really the only major update that Trump cited on Monday — could take Trump towards filling that $7 trillion gap.
To find out the answer, I used TaxBrain, the Open Source Policy Center’s interface to Tax-Calculator and several other open source models.
Ideally, I would model Trump’s original plan in detail, calculate its revenue effect, change the rate structure, calculate the new revenue effect, and take the difference. But Trump never laid out all of the details for his original plan, so instead I examine the major components of his individual plan that relate to the taxation of ordinary income.
I compared the revenue loss (relative to current law) from two scenarios. One features Trump’s new tax brackets and rates, corresponding to the House Republican’s proposal — 12, 25, and 33%. The other features his original tax brackets and rates — 10, 20, and 25%.
Both scenarios include other features of Trump’s plan, including his repeal of the alternative minimum tax and his expansion of the standard deduction (zero bracket) to $25,000 for single filers, $50,000 for joint filers, and $37,500 for heads of households. Both policies also repeal the major itemized deductions — state and local taxes, mortgage and investment interest expenses, charitable contributions, medical and dental expenses, theft and casualty losses, and the miscellaneous itemized deductions. (Trump has said that he would reduce itemized deductions, but hasn’t given any details. By eliminating them, I am exaggerating the revenue effect from the tax rate changes).
To further ensure that I’m calculating an upper bound on the revenue effect, I assume that individuals do not change their behavior in response to taxes. In the real world, behavioral responses would dampen the differences between a set of low tax rates and a set of higher tax rates.
Here is a link to TaxBrain, where I calculate the revenue loss relative to current law, with Trump’s original tax rates. Here is a link to the corresponding revenue calculation with Trump’s new, higher, tax rates. From these web pages you can always click on the link “Edit Parameters” to see (and change) all of the parameters I’ve picked for this exercise.
The difference in revenue loss between the two policies is $3.3 trillion.
What does this mean? If Trump’s team is serious about cutting the cost of his tax plan from $10 trillion to $3 trillion, we should expect many more changes to be forthcoming, because the rate schedule tweaks will only get him down to $6.7 trillion, at best. He may need to pare back the large expansion of the standard deduction.
As more news comes out, feel free to analyze it yourself using OSPC’s TaxBrain web application or the underlying economic models available athttp://www.github.com/open-source-economics.
First published at AEIdeas on August 10, 2016.
