Question

Evaluate Trump’s 2017 tax plan in terms of revenue collection. Do you think it might increase or decrease tax revenues? Why? What were your assumptions for your conclusion?  

Answer 1

Evaluate Trump’s 2017 tax plan in terms of revenue collection. Do you think it might increase or decrease tax revenues? Why? What were your assumptions for your conclusion?  

Answer-

• Mr. Trump’s tax plan would substantially lower individual income taxes and the corporate income tax and eliminate a number of complex features in the current tax code.
• Mr. Trump’s plan would cut taxes by $11.98 trillion over the next decade on a static basis. However, the plan would end up reducing tax revenues by $10.14 trillion over the next decade when accounting for economic growth from increases in the supply of labor and capital.
• The plan would also result in increased outlays due to higher interest on the debt, creating a ten-year deficit somewhat larger than the estimates above.
• According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly reduce marginal tax rates and the cost of capital, which would lead to an 11 percent higher GDP over the long term provided that the tax cut could be appropriately financed.
• The plan would also lead to a 29 percent larger capital stock, 6.5 percent higher wages, and 5.3 million more full-time equivalent jobs.
• The plan would cut taxes and lead to higher after-tax incomes for taxpayers at all levels of income.
• This plan would reduce individual income tax rates, lowering the top rate from 39.6 percent to 25 percent and creating a large zero bracket. The plan would also reform the business tax code by reducing the income tax on all businesses to 15 percent and eliminate business tax expenditures, including deferral and interest deductions. In addition, the plan would eliminate the Estate Tax and the Alternative Minimum Tax.
• While some aspects of the plan remain unspecified, many others are very clear, working within the existing income tax framework and lowering the rates. As such, we are able to model virtually all of the major provisions of the plan.

Impact on Revenue-

• Overall, the plan would reduce federal revenue on a static basis by $11.98 trillion over the next ten years. Most of the revenue loss is due to the reduction in individual income tax rates, which we project to reduce revenues by approximately $10.20 trillion over the next decade. The changes to the corporate income tax will reduce revenues by an additional $1.54 trillion over the next decade, with the remaining static cost ($238 billion) due to the elimination of the estate tax.
• However, if we account for the economic growth that the plan would produce, the plan would end up lowering revenue by $10.14 trillion over the next decade. The larger economy would increase wages, which would narrow the revenue lost through the individual income tax by about $666 billion and increase payroll tax revenues by $839 billion, with the remainder of the recouped revenue coming from other taxes.

Assumptions for the conclusion -

• assuming that the standard deduction (which resembles a zero bracket) was folded into the zero bracket proposed by Mr. Trump, rather than adding the zero bracket on top of the standard deduction.
• While Mr. Trump did not state specifically which corporate tax expenditures he wanted to eliminate (other than deferral), I approximated this by eliminating those that did not have to do with capital cost recovery. We increased revenues accordingly, though their value was substantially lower under a 15 percent rate than under today’s 35 percent rate.
• I did not account for profit shifting from abroad due to a lower U.S. corporate income tax rate. An increase in reported income in the U.S. could somewhat mitigate the revenue effects of the corporate rate cut. I also did not model the revenue impact of ending deferral. These are likely to be small in tandem with a corporate tax rate of 15 percent, because the 15 percent is lower than the average corporate tax rate abroad, so foreign tax credits make the additional U.S. tax in that case relatively small.
• Finally, it is worth noting that the Taxes and Growth Model does not take into account the fiscal or economic effects of interest on debt. It also does not require budgets to balance over the long term. It also does not account for the potential macroeconomic effects of any spending cuts that may be required to finance the plan.