Don’t count on Trump’s tax plan getting funded.

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Indivisible Movement

5 min readApr 27, 2017

Today Trump released his plan for a massive tax cut. Included in the cuts are a reduction in the number of tax brackets, a lowering of the top rate, reducing pass-through entity rates, doubling the standard deduction, repealing the Alternative Minimum Tax, repealing the Estate Tax, repealing the investment tax in the ACA, and imposing a one time tax holiday on money held overseas.

Suffice it to say there is a lot in there, with a lot of implications on tax revenue. Luckily these ideas have been around for some time, and there are dedicated people with tax accounting models to give us some idea of the fiscal effects immediately.

From the Committee for a Responsible Federal Budget link above

The organization that produced these numbers, the CRFB, is an one that is very concerned with the deficit. I would characterize the tone of their analysis as one of alarm at just how unfunded these tax cuts are. Their bottom line estimate is an increase in the deficit of $5.5 trillion over ten years, averaging to $550 billion a year. To put that in context, the 2016 budget deficit was $552 billion. Therefore, a purely unfunded cut would double our federal deficit and increase our debt that much faster.

In the announcement, the administration mentioned repealing other tax expenditures, but the President and Treasury Secretary were no more specific than that. While it is true that ending tax expenditures, otherwise known positively as deductions and negatively as loopholes, could fund these cuts, there are many problems in doing so.

First, here is a list of the largest tax expenditures (shown below).

From the Tax Policy Center Briefing Book 2016

As you can see from the table, there are hundreds of billions of dollars in tax deductions yearly, so it is possible in theory to close these loopholes in order to pay for the tax cuts. But in practice ending each of these loopholes entails significant political and economic difficulties.

Take the biggest expenditure for example, the exclusion of employer contributions to insurance. This represents the lack of tax paid when employers provide health insurance. It is basically the reason for our employer based health care system. Repealing it would cause a large rearrangement of our health care system. There are some good reasons to support such an endeavor, but doing so would be rife with difficulty, upset a large amount of people, and if not replaced by a similar tax break on individual purchases of health care, lead to an increase in taxes on working people.

So thats out, what else?

Exclusion of rental income is next. This is a little more complicated as a concept. Essentially it is the money that people would be making from rent in the housing they own. This could be considered taxable income, after all you are consuming that rental value in housing, but because no money changes hands, there is nothing to tax. This is why I don’t think this expenditure is going anywhere. The likelihood of the federal government taxing owner-occupied housing of an unclear and theoretical amount of rent is low.

There are those loopholes that Democrats might be willing to repeal, deferral of income from controlled foreign corporations, capital gains deductions, step-up of capital gains at death, etc. But this is Republican controlled Presidency and Congress. And I really worry what expenditures the Republicans are willing to cut. Might it be the Earned Income tax credit which has helped alleviate poverty in this country?

Regardless of what tax expenditure you attempt to repeal, doing so would be political difficult. Each loophole represents a defined constituency that will fight hard to keep that money. Tens of billions of dollars a year in concentrated economic benefit with costs that are as diffuse as all US taxpayers. That is a recipe for political disaster if you choose to go after that money. Even a small fraction of those dollars, if spent in lobbying and campaign contributions, would overwhelm most House and Senate candidates, and indeed even Presidential races.

But there are tax expenditures that should be closed, or at least modified, even at high political cost. The mortgage tax deduction for instance, because it isn’t capped, goes mainly towards the rich and incentivizes the purchase of bigger and more expensive homes. Treasury Secretary Mnuchin supports the idea of capping this deduction, and Democrats should support it as well. However, the whole of the deduction is ~70 billion a year. Even if you were able to cut 75% of that, it would get us nowhere near a revenue neutral tax cut.

In summary, I don’t think Trump, Mnuchin, or Paul Ryan can pay for these tax cuts. Unfunded tax cuts under Bush wrecked our economy and our federal budget, and we should oppose any unfunded tax cuts going forward.

Lastly, I wanted to say how horrible in form a lot of these proposed tax cuts are. Ending the estate tax will not only reduce tax revenue but will lead to a more generationally unequal society. Reducing the number of tax brackets places billionaires, who are already in the same bracket as millionaires, in with a bracket of working professionals. This is absurd and done deliberately to legitimize the next time the wealthy want a tax cut. We should have more brackets not fewer, placing a higher burden on the 1% and the .1% respectively. Repealing the Alternative Minimum Tax is a straight giveaway to the 1% and represents the opposite of closing loopholes. And the scariest provision might be the pass-through entity cut. Packaged as a tax cut for small businesses, this cut would likely have dynamic effects on our tax receipts as it will incentivize all earners to identify as pass-throughs, causing tax revenue to plummet further.

— Joey Rodriguez

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Don’t count on Trump’s tax plan getting funded.

Written by Joey Rodriguez