Trump’s new tax plan looks ‘dead on arrival’

Washington has perfected a rather macabre term over the years for unpopular legislation that lands on the footsteps of Congress: DOA or Dead on Arrival. President Donald Trump’s new tax proposal will most likely win this distinction.

America has been running deficits for 31 of the last 35 years. Total debt has reached $19.5 trillion and this year, the deficit is $441 billion. Trump’s new proposal — a 100-word outline, really — is mostly all tax cuts. No politician will vote for a package that will further deepen the deficit. Trump intends to cut the top marginal personal income tax rate from 39.6 per cent to 35 per cent while also doubling the standard deduction, so people will pay less on lower taxable income. He repeals the Alternative Minimum Tax, which is designed to ensure that the rich pay their fair share. (Americans calculate their taxes two ways — the regular way and the AMT way, and pay the higher burden of the two.) He also abolishes the estate tax (called the death tax because it is imposed on a person’s estate when he/she dies).

But wait, there are more cuts. He lowers the corporate tax rate to 15 per cent, from the current maximum of 35 per cent (the second highest in the industrialised world). This is actually an excellent idea because nearly $2 trillion of US corporate profits are presently stashed in shell companies abroad, in tax havens such as Bermuda or Ireland, to avoid high US corporate rates — and a lower tax rate will stop future flight.

Trump has said that he will offer a one-time package to companies to bring back the foreign stash — tied to infrastructure spending, for example. The risk is that companies may bring in the cash but disburse it on stock buybacks or dividend payouts — actions that do not directly help job creation, something Trump wants. The White House has not yet revealed how much revenue the Treasury will lose as a result of all these cuts but estimates are that they are in the $5-$6 trillion range. There are some revenue raisers in the proposal but on balance, the cuts are so steep that most legislators will balk. This is a key reason why Trump’s ideas are DOA.

The second DOA reason is that Trump’s reform proposals are not serious. In the last 50 years, the US has become a quasi-welfare state with 57 per cent of the government’s budget (social security; healthcare spending such as medicare and medicaid; food stamps and unemployment compensation) mandated by law. Called entitlement spending, these are sweeteners that politicians from both parties have championed to win votes. Add interest on the debt, and defence, which Trump actually wants to spend more money on, and one is now up to 80 per cent of the budget.

Any meaningful tax reform proposal must attack entitlements — such as raising the retirement age or cutting healthcare or welfare spending. But most lawmakers are opposed to cutting any benefits already granted, so the mandatory piece will continue to grow as interest on the debt grows. The discretionary part of the budget — about 20 per cent — funds every other aspect of the sprawling US government bureaucracy, from embassies to prisons. Trump has proposed cutting this but the pie is so small to begin with that no amount of savings will pay for his tax cuts. There’s just not enough money there. And then, there’s politics. Democrats are likely to criticise Trump for proposing tax cuts for the rich, including for his own family of companies, at the expense of the poor.

They are bound to mock Trump’s “trickle down” policies as tired and failed, Reagan-era policies which promote the idea that if you cut taxes deep enough, economic activity will increase so much that the tax cuts will pay for themselves. Washington is so divided now and Democrats so pleased at Trump’s failures in the first 100 days that they would probably vote against a Trump proposal honouring the American flag.

Finally, there are the majority Republicans. Trump is a RINO, a Republican In Name Only, and is the first truly independent US president. Republicans see no political liability in their districts if they oppose Trump (as they did in last month’s failed Obamacare repeal effort).

If it is DOA, Trump may still not lose much. He can claim in tweets that he tried to fulfil his campaign promises but the dreaded Washington swamp is coming in the way. Perhaps that was his plan all along.

The writer is MD of education consultancy Rao Advisors LLC

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