Hicks: Thoughts about Trump’s tax plan

MUNCIE, Ind. –This week, the Trump campaign sketched out a tax plan for what they hope to be a second administration. To be clear, Mr. Trump failed to achieve any of the policy goals of his first administration, and conducted a second campaign without a policy platform. So, it is hard to take seriously any of Mr. Trump’s policy. Still, it is always a good time to cogitate through the potential economic effects of tax proposals.

Every tax discussion today, and for the coming decades, should begin by acknowledging our enormous federal debt. This discussion must admit that our huge debt is wholly bipartisan. Mr. Trump, and the GOP House and Senate, was a far bigger spender than Mr. Obama. Before COVID, the Trump administration grew more federal debt than any other president who did not face a recession. During COVID, he blew lid off the debt, in what was the single largest one-time increase in debt across in US history. Mr. Biden extended the spending spree; he didn’t invent it.

Likewise, no member of Congress of either party is without blame. There are no honest actors. Even the handful of members who voted against big spending bills offer no serious pathway to reducing the debt. The perfidy of Congress is a good reason to critically evaluate these sorts of tax plans.

In considering any tax change, first question how it might eventually reduce the debt. That may be why Dr. Art Laffer spoke about the tax plan. Laffer became famous during the Reagan administration for arguing that reduction of high marginal tax rates would spur economic growth. His ‘Laffer Curve” provided a visual display of the ill effects of very high taxes on the U.S. economy and federal budget.

Dr. Laffer’s arguments won the day, and President Reagan secured major tax cuts. I believe these lower tax rates helped boost economic growth in the United States through the 1980s. But to be clear, the evidence on that point is far from decisive. Many economists, studying the issue in good faith, remain unconvinced that it played an important role in boosting growth.

However, the critical prediction of the Laffer Curve isn’t that cutting taxes would grow the economy. The real prediction is that tax cuts would increase economic growth so much that they would lead to an increase in tax revenues. On that point there is precisely zero disagreement. The evidence is overwhelmingly clear—the Reagan tax cuts failed to boost tax revenues.

It is important to note that when Dr. Laffer pushed his ideas into the political forefront, the top corporate tax rate was about 45 percent, and the top income tax bracket was 70 percent. They are today 21 percent and 37 percent respectively. If cutting those very high rates back in the 1980s didn’t boost tax revenues, cutting these lower rates cannot. The math on this issue ineluctable.

In a further twist, Mr. Trump also proposes to levy a further 10 percent tariff on Chinese imports. It is worth noting that the last time he instituted tariffs, the Midwest saw large manufacturing job losses. Indiana was hit especially hard, and in the few months before COVID, Indiana slipped into recession-like conditions. Mr. Trump’s tax plan is nothing but another campaign gimmick that’ll be forgotten in a matter of days. However, it raises important questions for other candidates.

Corporate taxes are popular with citizens who fail to notice that corporations are mostly owned by individuals through their retirement savings. So, taxing corporate profits actually taxes the retirement funds of teachers, firefighters, auto workers and anyone who owns a defined contribution retirement plan. While it is certainly fine to tax these earnings, they will again be taxed when they flow to retirees. So, corporate tax and income tax affect each dollar of retirement earning twice.

About 8 in 10 households eventually own some sort of retirement fund that owns corporations. At any given time about 6 in 10 families hold some sort of stock or retirement fund. So, calls to reduce corporate taxation can be motivated by equity concerns over the treatment of different types of income. We are all capitalists now.

Other factors influence the efficacy of a proposed tax change. The reduction of corporate taxes would reduce the tax burden on the richest 60 percent of the population, with a heavy weight of benefit flowing to older Americans. There is no such thing as an optimal level of progressivity, but we’ve long sided with Adam Smith in his Wealth of Nations that; “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

A large tax cut aimed at the middle class and more-affluent households is cause for consideration. However, I think it is less the progressivity issue than it is of intergenerational equity. You see, a tax cut on older Americans today will affect taxpayers who already will receive far more generous Social Security benefits than will today’s younger workers.

The very large federal deficit can only be remedied through some combination of benefit cuts and tax increases. Anyone who tells you something differently is either innumerate or lying to you (or both). So, a tax cut that is targeted at today’s older population will redistribute wealth from those receiving much higher government benefits to those likely to receive less.

There are reasons for one generation to bear a disproportionate tax. For example, it was the parents of the Greatest Generation who bore the tax burdens during and after World War II, following their own war and the Great Depression. There’s good reason they were called the Lost Generation. Yet, the tax and Savings Bond appeals of the 1940s very specifically focused on their duty to a younger generation. We would be a better country if we thought more about this sort of thing.

Tariffs likewise have a disproportionate affect on poorer households. A 10 percent tariff on China will make goods more expensive, both imported and domestically produced. Typically, young and poor households spend a higher share of their income on goods than do older, richer households. So, a tariff lands squarely on the shoulders of younger, poorer workers.

We probably shouldn’t take campaign promises too seriously, especially when they come to taxes. Still, asking key questions about taxes is an important way to judge candidates. How serious are these candidates, what do they say they care about, and how carefully do they consider the effect of taxes on different constituents? Taxes are not the most important issue facing our nation today, but they offer a very clear, quantifiable gauge on candidate priorities.

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. 

This article originally appeared on Lafayette Journal & Courier: Hicks: Thoughts about Trump’s tax plan