His truest supporters may not care, but President Donald Trump is promising much deeper tax cuts than Washington is likely to deliver.
During a highly touted speech in Indianapolis on Sept. 27, Trump said, with familiar hyperbole, that he was aiming for the “largest tax cuts in our country’s history. Our current tax system is a colossal barrier standing in the way of America’s comeback,” Trump said. “There’s never been tax cuts like what we’re talking about.”
That’s an overstatement, but Trump’s cuts would be substantial. Trump hopes to slash the top corporate rate from 35% to 20%, while let corporations bring home profits stashed overseas at reduced rates. For individuals, he’d reduce seven tax brackets for individuals to three and increase the standard deduction from $12,000 to $24,000, furthering lower taxes for many filers.
The idea is for just about everybody to get a tax cut, with nobody feeling any pain. But Washington doesn’t quite work this way and the ultimate result will be much more modest tax cuts for fewer people, if Congress can even get that far. “The proposed changes seem likely to be scaled back as the congressional debate progresses,” Goldman Sachs advised clients. “The plan released this week will need to be scaled back substantially.”
Trump shoots for the moon
Trump is aiming big, of course, and on one hand it might be shrewd to shoot for the moon at the beginning of negotiations. But Trump has promised big on other matters and come up empty-handed, contributing to the narrative that he can’t win in Washington. Three Trump-backed efforts to repeal the Affordable Care Act have gone down in flames, embarrassing the GOP. Trump’s southern border wall is an unfulfilled campaign pledge and the North American Free Trade Agreement, which he vowed to undo, remains in effect.
Trump faces better odds on tax cuts, because Republicans who control Congress have been working on plans for years. But Congressional procedures and simple budget math put limits on how far Congress can go.
Here are the tedious details: First of all, tax cuts cost the government revenue, and U.S. taxpayers are already $20 trillion in debt. So there will be some pushback against measures that push the debt much higher. You’ll probably hear that this shouldn’t be a problem, because tax cuts magically make the economy grow faster, meaning incomes go up and the government actually collects more in revenue. This is largely hogwash, and besides, Senate budget rules limit Congress’s ability to rely on magic potions.
The Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — but there’s a catch: The bill can add no more than $1.5 trillion to the national debt during the next decade. Cuts of the magnitude proposed by Trump would add around $2.2 trillion to the debt, according to the Committee for a Responsible Federal Budget. Other estimates put the cost at $4 trillion or higher. So Trump is way off the mark right out of the gate.
Here’s what you could do if you were willing to give up $1.5 trillion in revenue over 10 years, according to recent analysis by JPMorgan Chase: cut the corporate rate from 35% to 20%, or cut rates paid by individuals by about 2 percentage points. But you couldn’t do both. Cutting corporate rates without giving middle-class earners a tax cut is a political nonstarter. You could split the difference, cutting the corporate rate to around 28%, while giving typical families a 1-percentage point tax cut. But that’s kind of hard to explain to voters, too, and it would still fall way short of Trump’s goals.
Congress could pass tax cuts of more than $1.5 trillion, but that would require 60 votes in the Senate, which means some Democrats would have to sign on. What would it take to get “Chuck and Nancy,” Trump’s temporary Democratic allies, on board? Probably large tax cuts for lower and middle earners, with a sharp limit on giveaways to corporations and the wealthy. How much of your personal money would you bet on that sort of compromise?
It’s also possible Congress could come up with other sources of revenue that help pay for a combined tax cut of more than $1.5 trillion. If done right, closing loopholes and eliminating deductions would raise some needed revenue, while making the tax system fairer and more efficient. But tell that to the people whose loopholes might be targeted — which includes homeowners, small businesses, retirees, and people who get health insurance from an employer. Some, even most, of them could end up better off if they give up a skewed tax break in exchange for lower rates and a fairer system. But who trusts Washington to pull off such a feat? The answer: virtually nobody who voted for Trump and few who voted for anybody else.
Obamacare repeal revisited
As if these hurdles aren’t enough, there’s some talk among Republicans of attaching yet another effort to repeal the Affordable Care Act to a tax cut bill, in the hope that tax cuts would have enough momentum to carry ACA repeal over the finish line. Yes, that’s delusional. But apparently there’s a masochistic wing of the Republican Party.
The good news for Trump is he ought to be able to wring some kind of tax cut out of Congress. The corporate rate might fall to 25% or so. Multi-nationals will probably be able to bring back $1 trillion or more in profit at unusually low tax rates. And most families might see a modest tax cut that will put a few hundred extra bucks in their pockets. Trump can claim victory and forget about whether it’s the biggest tax cut ever. Or go on fighting.
Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman
