When talking about taxes in this campaign, Donald Trump has often sounded like a different kind of Republican. He says he will take on “the hedge fund guys” and their carried interest loophole. He thinks it’s “outrageous” how little tax some multimillionaires pay. But his plan calls for major tax cuts not just for the middle class but also for the richest Americans — even the dreaded hedge fund managers. And despite his campaign’s assurances that the plan is “fiscally responsible,” it would grow budget deficits by trillions of dollars over a decade.
You could call Mr. Trump’s plan a higher-energy version of the tax plan Jeb Bush announced earlier this month: similar in structure, but with lower rates and wider tax brackets, meaning individual taxpayers would pay even less than under Mr. Bush, and the government would lose even more tax revenue.
Currently, the top income tax rate for regular income is 39.6 percent. Mr. Trump would cut that rate to 25 percent, the lowest level since 1931. He’d cut maximum rates on capital gains and dividends to 20 percent from 23.8 percent. He’d cut the corporate tax rate to 15 percent, and also offer a special tax rate of 15 percent to business owners — less than half what they may pay under today’s rules. He’d abolish the estate tax entirely.
Mr. Trump says he’d pay for those tax rate reductions by “reducing or eliminating most deductions and loopholes available to the very rich.” But in truth, rich people already pay tax on most of their income, so there’s less revenue available from cutting rich people’s tax breaks than Mr. Trump and many voters believe.
In 2013, taxpayers earning between $500,000 and $10 million deducted or exempted an average of 12 percent of their income from tax; for those earning more than $10 million, the figure was 16 percent. If those deductions were abolished entirely (and Mr. Trump proposes only to reduce them), that would not come close to paying for a cut in the top tax rate from 39.6 percent to 25 percent, which is a relative reduction of 37 percent.
Mr. Trump has also proposed taxing investment returns related to life insurance that currently don’t appear on tax returns at all. This would raise more revenue than you might expect, perhaps $20 billion a year at Mr. Trump’s proposed tax rates, but still wouldn’t be enough to offset the high-end rate cuts.
Even the hedge fund managers Mr. Trump has railed against on the stump would get a tax cut under his plan. The usual fee structure for a hedge fund is called “2-and-20”: a flat management fee (often 2 percent) on all assets, plus a performance fee (often 20 percent) on profits above a set threshold. Currently, the management fee is taxed at ordinary rates up to 39.6 percent, while the performance fee enjoys a preferential rate of 23.8 percent. Under Mr. Trump’s plan, all this income would be taxed at a maximum of 25 percent. The performance fee would be subject to a small tax increase, but that effect would be dwarfed by the large tax cut on ordinary management fees.
Another large, though less-noticed, tax cut in Mr. Trump’s plan is a reduction in the maximum tax rate on “pass-through income” to 15 percent; currently, this income is taxed at the same rates as wage income, up to 39.6 percent.
Pass-through income is often described as “small-business income,” but that term can be misleading. Small-business owners can use corporate structures, like limited liability companies, that are not taxed. Instead, the income from these companies is passed through to their individual owners, who then pay tax on their individual income tax returns. Those small-business owners would enjoy this tax reduction from Mr. Trump, but so would the owners of large businesses that may also choose to use these same ownership structures. The tax break would also go to independent contractors like me: The New York Times pays me a salary, but when I do work for other organizations, I treat the payments as small-business income, and I’d get to use the 15 percent rate proposed by Mr. Trump.
In addition to offering huge tax cuts to the rich and to business owners (including me!), Mr. Trump would offer huge tax cuts for the middle and upper-middle class. Married couples would pay no tax on their first $50,000 of income and just 10 percent on the next $50,000. A married couple with no children earning $100,000 and taking the standard deduction would pay $11,437 in income tax under today’s rules; under Mr. Trump’s plan, they would pay just $5,000, a tax cut of 56 percent. Many people with low-to-moderate incomes would see their income tax bills reduced to zero, increasing the share of the population that pays no income tax at all.
He’d also offer huge tax breaks to corporations, which would pay 15 percent, down from a current rate of 35 percent. Corporate tax is the main place where his plan departs from Republican orthodoxy, but in a fairly arcane way. Mr. Trump would tax the worldwide income of American corporations at the time it is earned. Currently, American companies may delay tax on foreign profits until they return those profits to the United States. Many Republicans (including Jeb Bush) would move in the other direction and forgo tax on foreign income altogether, arguing that worldwide taxation makes it harder for American companies to compete abroad.
By demanding immediate tax on foreign profits, Mr. Trump’s plan would disfavor American companies that locate their businesses abroad, which is consistent with his broader theme of pushing companies to return factories and jobs to the United States. However, because he would cut the corporate income tax rate so steeply, the effects of immediate worldwide corporate taxation would be limited: Companies get a credit for tax paid to other countries, so Mr. Trump’s tax would apply only on foreign profits that were not subject to tax by a foreign country at a rate of at least 15 percent. This would mostly affect income earned in tax havens, as most major countries have corporate income tax rates of more than 15 percent.
In other words, Mr. Trump’s worldwide tax plan would have no effect on Ford’s choice to make cars in Mexico, so long as they’re paying at least 15 percent in tax to Mexico on their Mexican activities.
A document from the Trump campaign says all these tax cuts would be “fully paid for” by the elimination of deductions and by a one-time tax on foreign profits of American firms held abroad. That math simply does not add up: As discussed above, rich people do not currently take enough tax deductions to offset the tax rate cuts Mr. Trump proposes, and the one-time foreign profits tax might raise $250 billion, not close to the trillions of revenue that would be lost through tax rate cuts.
At a news conference Monday, Mr. Trump offered another way his tax plan would pay for itself: economic growth, perhaps as fast as 6 percent a year, again a higher-energy estimate than the 4 percent Mr. Bush has proposed. But there is no evidence to support the idea that such rapid growth can be produced through tax cuts.