Wednesday night, Donald Trump unleashed a surprisingly passionate defense of progressive taxation in response to Ben Carson's bizarre proposal to replace the federal tax code with a Biblical tithing system.
"The thing about the flat tax that I don't like is that if you make $200 million a year you pay 10 percent, very little relatively to someone making $50,000 a year," Trump said, replying to Carson's plan for a 10 percent flat tax, modeled after 10 percent tithes to churches. "We've had a graduated tax system for many years, so it's not a socialistic thing." Trump also promised that his own tax plan would be coming in a couple of weeks.
But Trump actually has a tax plan already. Back in 2011, when he was first weighing a Republican run for president, he wrote the book Time to Get Tough, whose fourth chapter — "It's Your Money - You Should Keep More of It" — lays out a detailed plan to overhaul the federal tax system.
The plan would eliminate the corporate income tax and estate tax entirely, and replace the individual income tax with a new, four bracket system:
- 1 percent for income from $0 to $30,000
- 5 percent for income from $30,000 to $100,000
- 10 percent for income from $100,000 to $1 million
- 15 percent for income above $1 million
For comparison, the current top tax bracket is 39.6 percent, and kicks in at a family income of $464,850 a year, less than half Trump's proposed thresholds. And a 15 percent top rate is far below what his rivals are suggesting. Marco Rubio wants a 35 percent top rate; Jeb Bush wants one at 28 percent. Rand Paul wants a 13 percent flat tax, which would wind up taxing all but the very richest Americans more than than Trump's proposal.
To top it all off, Trump proposes a 20 percent general tariff — essentially a sales tax, but collected at the border — on all imported goods.
The Time to Get Tough plan is sharply regressive
Just about every step of this plan is ridiculously regressive.
Let's take the individual income tax plan for starters. This is an across-the-board cut to income tax rates, and all across-the-board rate cuts are regressive. Sure, the bottom rate is lowered to 1 percent, but it's also lowered to 1 percent for millionaires. They get taxed less on their first $30,000 in earnings too – and on the next $70,000, as 5 percent is lower than any current bracket. And since Trump's 10 percent bracket applies to income that, for households, is currently taxed at 25 to 39.6 percent, millionaires and people making six figures get a BIG break there too. And the top 15 percent rate for millionaires is yet another big windfall for the rich to top it all off. Here's how people with different taxable incomes would far under Trump versus the current tax code:
It gets worse. Trump is vague about what tax credits and deductions he'd keep, but the book implies that he wants to keep none. He describes his rate schedule as his entire tax plan, and his statement that it "can be filled out on the back of a postcard" implies he wants to do away with deductions entirely:
This is very bad news for low income Americans, many of whom either pay nothing income tax or actually get money back through refundable credits like the Earned Income Tax Credit and the Child Tax Credit. This year, 66.2 million households — 40.4 percent — fall in that camp. If Trump really does intend to start taxing income at the first dollar made, the poorest two-fifths of America will wind up paying more, not less.
The estate tax repeal and capital gains tax cut also primarily benefit the rich. Nearly half of the estate tax burden is paid by the top 0.1 percent, those making over $2.6 million in 2013. 93.1 percent of the burden is paid by people making over $200,000. The estate tax is the most progressive tax on the books:
As for capital gains, the 20 percent bracket introduced by President Obama that Trump wants to eliminate only applies to income above $464,850 a year (for married couples). Eliminating it would thus only benefit the richest of the rich, especially rich investors. The Tax Policy Center estimates that 70.9 percent of capital gains taxes are paid by millionaires. So while today's Trump offers rhetoric about wanting to make financiers pay their fair share, his 2011 tax plan handed them a big tax break. That would be true whether or not you also close the carried interest loophole, a provision he's criticized under which hedge fund managers pay capital gains tax on their normal income. Since Trump is cutting the top tax rate for regular income to 15 percent, and the current top rate for capital gains is 20 percent, taxing investment gains as normal income would still constitute a tax cut.
There's some dispute as to who ultimately pays the corporate income tax, but Jim Nunns of the Tax Policy Center has found that about 20 percent is paid by workers, and the rest by capital. He concludes that in 2015, the top 1 percent pays 52.8 percent of the corporate tax burden, and the top 0.1 percent pays 33.4 percent. Eliminating the corporate tax could be distribution-neutral if we were to introduce a bunch of new, higher tax rates on rich people. But Trump does not do that.
Trump's plan to kick it Gilded Age style
Finally, there's the proposed 20 percent tariff on imported goods. This would basically return the US to policy before the enactment of the income tax in 1913, when the federal government was funded almost entirely through tariff revenue. Indeed, the US "free and dutiable tariff rate" — tariff revenue divided by the total value of all imports, whether subject to tariffs or not — hasn't exceed 20 percent since 1911. After World War II, the US began aggressive trade liberalization, and by the late 1970s the rate was down to 3-4 percent. In 2010 it was 1.4 percent.
If Trump really wants to put a 20 percent tariff on everything, he'd be setting US tax policy back 100 years. His top income tax rate of 15 percent isn't as low as the 7 percent top rate in the first constitutional federal income tax — but it's closer to that than it is to the current code.
Suffice it to say, slapping a 20 percent tariff on everything is a horrible idea. It would be a clear, aggressive violation of the US's duties as a member of the World Trade Organization, which would likely rule the tariff an unfair trade practice and allow for retaliatory tariffs from other countries as punishment. That would hurt US exports, reducing or eliminating any gains to domestic industry due to lowered foreign competition. It'd make workers in export-reliant developing countries worse off and deny them alternatives to subsistence agriculture. And in the US, it'd mainly fall on poor people, who consume more of their income than the rich, and so bear the burden of sales taxes (including sales taxes limited only to imported goods) more severely. It's a lose-lose-lose proposition.
Trump also says he wants a 15 or 20 percent tax on companies that outsource jobs. He doesn't literally write "15 or 20 percent," he just writes a different number on page 63 than he does on page 65:
This isn't an unprecedented idea. In 2010, Sen. Chuck Schumer (D-NY) proposed taxing companies that outsource call center jobs. These kinds of plans would likely be struck down by the WTO as unfair trade barriers, and even if they weren't, they wouldn't do much of anything to bring jobs back to the US. That ship has sailed; not even people who believe US trade policy contributed to the decline of manufacturing don't think those jobs will return should we start fighting outsourcing aggressively. Like the tariff, the policy would mostly serve to hamper growth and increase prices, with low-income consumers paying much of the burden.