Trump's Income Tax Avoidance Plan (Apr. 28)

Update 176: Trump’s Income Tax Avoidance Plan

All of 200 words and 7 numbers, President Trump’s one-pager tax plan released this week generated scores of lengthy news articles and analysis in the last three days, each pounding out the rates, revenues, arrears and the ramifications of this bare-bones proposal.

Given the limited scope of the facts available, this would be remarkable, except that the media and much of the country is grasping at straws, desperate for details at this juncture, 100 days in. Incomplete has to be the grade.

Below we look at one tax plan provision that has escaped scrutiny even though it would cost an estimated $1.5 trillion, 2016-26, or one fourth of the plan’s total forgone revenue.

Good weekends all,

Dana

_________________________________

Kansas, 2012

Kansas Governor Brownback enacted that year what is now regarded — in the words of a GOP state legislator — as a failed Randian governing experiment when he brought the state tax rate down by about 60 percent for S-Corps, creating a loophole option for anyone with a lawyer available to them. Just incorporate as an LLC and dip out of paying significant income taxes.

According to the Tax Policy Center, after the institution of the new policy in Kansas, 191,000 “small” businesses expected were expected to file, but 400,000 businesses filed. This resulted in a $700 million decrease in state personal income tax revenue, mainly to the pass-through exemption.

Purist Randians would have been perplexed by this, seeing as Brownback didn’t institute commensurate cuts in government programs and spending, as the resulting insolvent policy combination created a state-wide deficit that cost Kansas’ credit rating two downgrades and a budget that cannot be balanced to this day.

As Republican State Senator John Doll said in support of the bill, “The right thing is to get out of this mess.” Federal policymakers should learn from Kansas’s example and avoid the mess in the first place.

Republican House Member Stephanie Clayton said about the identical policy that President Trump proposes on a trillion-dollar scale with his one-pager, “We’ve seen this movie.” Voting for the Trump plan as a even as moderate conservative Kansas Republican would be unthinkable, because they’re still struggling to climb out of the hole it left.

Scale Comparison

But the Kansas situation is a small-scale experiment, so how would this look on the national level? We have the linear data, showing that every time a stable economy received large-scale tax cuts under a conservative president (2001, 2003), there was not a large impact on the rate of growth.

A short-term spike might be possible, but if you eat your dessert first the potatoes will still be sitting there waiting—the deficit will still be looming and accumulating interest at rates that are surely not going to remain as low as they are today.

What’s the Damage?

If Trump’s plan is enacted, the tax rate for s-corp filers would drop from 39.6 percent to 15 percent, which would in essence be an tax cut of 62 percent for small business owners— “small” business owners. The majority of these filers are in the top 1 percent of earners in the US. Last year, 38 million taxpayers filed reporting passthrough entities (which is 40 percent of taxpayers. Most of these are in the top income bracket, earning more than $400,000 a year.

The plan is an outlier as…

*  Severely Regressive:  About half of all pass-through income flows to the top 1 percent of households (those with incomes above $693,500 in 2016); only about 27 percent goes to the bottom 90 percent of households. The tax-cut benefits would be even more skewed than these figures suggest: higher-income households would get a larger tax break on each dollar of their pass-through income than other households because they are in higher income tax brackets.

*  Abetting Avoidance:  The provision would create major new opportunities for tax avoidance.  Roughly 40 percent ($650 billion) of the $1.5 trillion cost would come from high earners reclassifying their non-business wage and salary income as pass-through income to take advantage of the lower rate.  The revenue losses due to tax avoidance would easily exceed the provision’s total tax cuts for the bottom 99 percent of the population

* Drastically Expensive:  The plan, in sum, costs the US government about 6.2 trillion in revenue over the first 10 years, and would increase the federal deficit by 7 trillion in the first 10 years, rising to 20.7 in the first 20 years (numbers from the Tax Policy Center).

Additionally, many tax experts regard the pass-through as a major culprit in underreporting, fraud, and general tax avoidance. TPC estimates that $649 billion of the proposal’s cost would come from high earners avoiding taxes by claiming that more of their income is from pass-through businesses.