The Trump Administration’s “Unified Framework for Fixing Our Broken Tax Code” has been analyzed by the non-partisan Tax Policy Center and their findings are rather interesting in this age of a $20 trillion plus national debt. In this posting, rather than focusing on the impact of the tax plan on individual and corporate tax levels, I will be focusing on the impact that the proposed tax changes will have on federal revenue since revenue is one of the keys to maintaining fiscal balance.
Let’s start by looking at the most recent data showing the breakdown of the federal debt:
Of the $20.245 trillion in debt current to the end of September 2017, $14.199 trillion is in the form of marketable debt.
Here is a graphic showing the current debt-to-GDP ratio:
As we now know, the new tax framework would see the current seven individual income tax rates collapse into three rates, 12, 25 and 33 percent, depending on income level. As well, among other things, the Trump tax plan would increase the child tax credit, repeal both the individual and corporate alternative minimum taxes, repeal the estate tax and reduce the corporate tax rate from its current 35 percent down to 15 percent. Owners of pass-through entities including sole proprietorships and partnerships (among others) could be elected to be taxed at a flat rate of 15 percent on their pass-through income rather than under regular income tax rates (which would be 33 percent).
Let’s look at the impact on revenue. The Tax Policy Center estimates that the Trump tax plan would reduce federal tax revenues as follows (all estimates are before accounting for macroeconomic feedback effects):
1.) Corporate Tax Revenue – by dropping the headline corporate tax rate to 15 percent, Washington would see its corporate tax revenue drop by $145.9 billion in 2017, rising to $289.8 billion in 2021. Total corporate tax revenue would drop by $2.633 trillion over the period from 2016 to 2026 and by $3.231 trillion over the period from 2027 to 2036.
2.) Individual and Payroll Tax Revenue– all proposed changes to the individual and payroll tax regime would result in Washington seeing its individual tax revenue drop by $198.3 billion in 2017, rising to $327.9 billion in 2021. Total individual tax revenue would drop by $3.343 trillion over the period from 2016 and 2026 and by $5.385 trillion over the period from 2027 to 2036.
If we take the macroeconomic feedback effects using the Penn Wharton Budget Model into account, (i.e. the impact of tax changes on economic growth rates which range from an increase 1.0 percent in 2017 to a decrease of 0.5 percent in 2026) the total revenue losses between 2016 and 2026 will total $5.952 trillion or 2.6 percent of GDP and $10.312 trillion or 3.0 percent of GDP between 2027 and 2036. These tax measures will have an impact on the deficit and debt as follows:
1.) Deficit – the deficit will increase by a total of $7.004 trillion between 2016 and 2026 and $15.138 trillion between 2027 and 2036.
Here is a table showing the full analysis with and without taking macroeconomic feedback effects into account:
Given the already high sovereign debt levels of the United States and that there is likely to be repeated economic contractions over the next two decades that have not been accounted for in this analysis and the fact that higher debt levels may result in investors demanding a higher interest rate on Treasuries, it is quite apparent that the Trump tax plan will have to be accompanied by spending cuts if Washington wishes to retain any sense of fiscal balance. So far, the past few administrations suggest that Washington is quite reluctant to make the spending cuts necessary to achieve even a semblance of a balanced budget, preferring to kick the “debt can” further and further down the road.
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