Trump’s Tax Plan: Do We Really Love Our Children So Little?

This essay first ran in the San Francisco Chronicle on September 28, 2017.

The most important thing to know about the Republican tax plan that Trump is now trying to sell is that it doesn’t cut taxes. It shifts them, from wealthy taxpayers today to all of our children.

Income Tax and Inequality
Stanford Law School Professor Joseph Bankman

The big winners in the Trump plan are clear: Taxes on corporate income would fall from 35 percent to 20 percent, and the rate on corporate income from abroad would fall to zero. High-income taxpayers (those earning more than $418,000), who indirectly benefit the most from the near-elimination of corporate tax because they typically are investors, would see their tax rate fall from 39.6 percent to 35 percent. Some middle-income taxpayers would get a smaller bone, in the form of an increased standard deduction.

There is only one revenue raiser: The deduction for state and local taxes is eliminated. This move, widely seen as aimed at high-tax blue states such as California, doesn’t come close to ensuring the proposal would neither increase nor decrease federal tax revenues. The bipartisan Committee for a Responsible Federal Budget estimates the proposal would produce a net shortfall of more than $2 trillion. This would increase the government debt, which means higher annual interest payments by tomorrow’s taxpayers — our children.

The economics of borrowing to pay taxes can be understood by a simple example. Suppose we each mortgaged our family business and used the proceeds to pay this year’s taxes. Or charged our taxes on our credit card, and decided to ignore the debt for as long as possible. We’d have more money to spend right now. That would (perhaps) make us happier, and benefit merchants.

Eventually, however, we’d face huge monthly payments on our credit card or loan. We’d have to cut consumption, and that would hurt merchants and shrink the economy. There are lots of terms we might use to describe this plan. Short-sighted and reckless come to mind. One term we wouldn’t use, though, is tax cut.

We wouldn’t think we found a way to reduce taxes. And we wouldn’t pretend that the cycle of spend today and pay back tomorrow was a net positive for the economy.

A true tax cut comes from a reduction of spending. The Trump administration has proposed significant increases in military spending and border enforcement (walls that run 1,000 miles turn out to be quite expensive). Draconian cuts to the Environmental Protection Agency and other agencies, even if carried out, wouldn’t do anything more than offset those costs. The tax proposal isn’t tied to any meaningful cut in spending. It is solely a plan to borrow the cost of government.

There is one difference between the Trump proposal and the mortgage-the-family-business plan. When we take out individual loans, we know that we, or perhaps our own kids, will be stuck with repayment. When we run up the government debt, the distribution of the burden among our children is unknown.

It is likely that today’s borrowing, which would fuel consumption of the wealthy, would be paid off by Americans more broadly through a national sales tax, or a valued added tax (VAT). Our children would pay higher rates, and by the same logic that states that today’s cut stimulates the economy, tomorrow’s increase would shrink the economy. (Of course, if the market anticipates all of this, the economy wouldn’t increase. Instead, interest rates would rise, as the debt crowds out private investment).

President Trump, of course, has a long history of borrowing to fuel his own conspicuous consumption, and skipping out on repayment. In this proposal, he invites us to join in that practice.

Joseph Bankman is the Ralph M. Parsons Professor of Law and Business at Stanford Law School. A leading tax law scholar, he has worked with the State of California to create ReadyReturn—a completed tax return prepared by the state that is available to low-income and middle-income taxpayers.