Why the Trump tax plan’s fuzzy math​ doesn’t add up – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From MarketWatch

Senate Republicans last week agreed on a budget resolution allowing a $1.5 trillion increase in the federal deficit over the next 10 years from tax legislation. This resolution paves the way for 51 Republican Senators to enact mammoth tax cuts by September 30, 2018.

Let’s be clear: these are tax cuts, despite their tax reform rhetoric.

As the centerpiece of these tax cuts, President Donald Trump has proposed to lower the corporate tax rate to 15% from 35%. However, despite the deficit cushion of $1.5 trillion allowed by last week’s budget resolution, a 15% rate is totally unrealistic.

Cutting the corporate tax rate to 15% would cost the U.S. Treasury $3.7 trillion over 10 years. But that cost cannot come close to being offset by repealing existing tax preferences, which all will be fiercely defended by special interests. A realistic legislative target would be a corporate tax rate of 25%. And under Senate rules this rate would have to expire after 10 years because it creates future budget deficits.

Let’s do the math on corporate and individual rates, together with optimistic assumptions about limiting existing tax preferences. The numbers are based on dynamic estimates from the nonpartisan Tax Policy Center, unless noted otherwise.

First, Trump’s proposal to cut the corporate tax rate from 35% to 15% will cost taxpayers $2.3 trillion in forgone tax revenues over the next 10 years. An additional Trump proposal would allow business income received by owners of pass-through entities, such as partnerships or LLCs, to be taxed at 15% rather than the higher rate on ordinary income earned by individuals. If this proposal excluded business income from large partnerships — a tough political sell — it would cost $1.4 trillion over 10 years. So the total revenue loss from a 15% cut would be at least $3.7 trillion.

Now, let’s see if that deficit can be reduced enough by limiting the existing tax preferences of business. To start, suppose all of the current targeted tax breaks for specific industries could be repealed. This would include: taxing incentive fees of hedge fund managers as ordinary income, not capital gains; repealing the special deductions for domestic oil and gas production, as well as eliminating tax credits for renewable energy and low-income housing. Best-case scenario: those raise $270 billion in tax revenues over 10 years.

Suppose further we could limit deductions by businesses to 50% of the interest paid on bonds or loans. This limit would mitigate the tax code’s tremendous bias in favor of debt over equity financing. In my view, this limit could optimistically raise $380 billion over 10 years — after politically necessary exemptions for interest payments by small businesses and financial institutions.

Read the full post at MarketWatch.

Robert Pozen is a Senior Lecturer at the MIT Sloan School of Management and a Senior Fellow at the Brookings Institution.

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