It's Even Worse Than You Think Read online

  Early in the campaign there was a clear indication that Trump was not comfortable with tax policy, not even when reading from a script. Trump’s announcement of his tax plan, such as it was, in September 2015 contrasted with the launch of his campaign three months earlier in the same place, the lobby of Trump Tower.

  In announcing his latest presidential run, Trump arranged for live national television coverage. He denounced China for not acting as he wished, accused the Mexican government of sending rapists and murderers across the border illegally, and promised to make Mexico pay for a wall on America’s southern border. He mangled many facts, most bizarrely when he declared that in the first three months of 2015, America’s Gross Domestic Product—the value of all economic activity—“was below zero. Whoever heard of this? It’s never below zero.” No one had heard of such a thing because it has never happened. Instead of all economic activity stopping, the American economy grew, albeit at the very slow rate of a fifth of one percent. What made Trump’s statement astonishing was that he earned a bachelor’s degree in economics from the University of Pennsylvania. Trump often claims he was a top student there, though no record of any academic honors being conferred on Trump has ever been found.

  Wild claims, nonsense facts and all, were less significant than the image Trump projected when he announced his campaign for the presidency in June 2015. His speech and body language showed how years as host of a reality television show and performing promotional work for himself and his businesses made for a polished performance. His words flowed with easy cadence, the movements of his hands and body coordinated to project the image of a formidable power.

  To the national television audience, it also seemed that Trump’s racist, anti-immigrant speech had found an adoring audience right in the liberal heart of America’s biggest city. Vigorous applause interrupted his remarks forty-three times, but not once was Trump knocked off his rhythm. The ovations, it came out the next day, did not come from ardent fans, however. Midtown Manhattan had not suddenly become a mecca for racists, white supremacists, and xenophobes. A help-wanted ad revealed that the seemingly adoring audience was salted with actors paid fifty bucks each to clap on cue.

  Three months later when Trump announced his first tax plan, in the familiar Trump Tower lobby, the delivery was quite different, the polish and his customary bravado absent.

  Trump read uneasily from a statement, looking down at the text on a lectern and then lifting his head as he haltingly repeated brief snippets of the words he had just seen. His cadence suggested that many of the words, as well as the concepts behind them, were unfamiliar. Only when he was slinging slogans was the delivery closer to the forceful and animated Trump that audiences were getting to know.

  “I think you will see we have an amazing code,” Trump said, implying that, as with George W. Bush in the year 2000, he already had a fully developed tax plan even if, like Bush, he would not show it to anyone until after Election Day. Trump even let slip with his choice of verb tense that he didn’t yet have a tax plan written down. “It would be simple,” he said using a conditional verb and then quickly adding, “it will be easy, it will be fair.”

  Speaking somewhat bumpily and dropping words, Trump continued. “It’s graduated as you get up in income, you pay a little more. Some of the very unfair deductions that certain people have been given who make a lot of money will not [be] available any longer, but I believe they’ll do better because I think the economy will grow. It will grow rapidly and [we] will have something very special. . . .

  “I did the [tax] plan with some of the leading scholars and economists and tax experts that there are in this country,” Trump boasted. “They love it. They say, why hasn’t this been done before? And this is my wheelhouse, that’s what I do well. The economy is what I do well.”

  There was no panel of experts standing behind or beside him, however. There were no economists and tax specialists waiting off camera to brief reporters and answer questions. There were no names made available to reporters so they could follow up with these experts.

  Trump also promised huge tax cuts for big business, saying this would spur investment. He didn’t mention that Bush’s 2001 tax cuts failed to do that, nor did he point out that he would be a major beneficiary of such tax cuts.

  Trump then ticked off numbers on tax rates. Partners in accounting, law, medical, and other firms and freelancers would pay a 15 percent rate on their profits, not up to 44.4 percent with the surtax for Obamacare. The 35 percent corporate tax rate also would be cut to 15 percent. Cutting tax rates is not tax reform, which in American politics has long meant eliminating loopholes and favors like letting real estate professionals live tax-free and other provisions that distort economic decisions.

  Next, Trump said he would repeal the estate tax, which applied each year to fewer than five thousand very large fortunes. Out of every thousand Americans who die, just two owe any estate tax, and the average tax paid comes to 17 percent of the fortune, IRS data show. If Trump really had the fortune he claimed, a net worth of more than $10 billion, he stood to gain by eventually passing the full amount to his heirs instead of paying around $4 billion in estate tax, which would mean leaving his unfortunate heirs a paltry $6 billion or less. Only after the election would he reveal that his net worth was less than $2 billion and even that figure was likely significantly inflated.

  The most tantalizing element, the one designed to win lots of votes, was Trump’s promise to eliminate income taxes for half of those currently filing tax returns. Trump said he would exempt the first $50,000 for a married couple, half that for singles. Instead of filing a tax return these households would sign a “one page form to send the IRS saying, ‘I win.’ ”

  To millions of Americans that sounded wonderful, fantastically wonderful. For 90 percent of taxpayers, average income had been flat from 1967 through 2012. During the first eight years of the twenty-first century, the population grew five times faster than jobs. These two factors combined into a powerful incentive for many to vote Trump. The trick was to convince people he knew what he was talking about, that he really was a tax law expert. And, of course, he would need to persuade Congress to make his plan into law. He stoked the idea that he was such a skillful negotiator that Congress would do just as he asked—and pronto.

  Trump’s words provoked a very different response among the relatively small group of serious students of tax. They knew that those numbers could not possibly add up to anything but buckets of red ink spilling across federal ledgers, the federal debt rapidly expanding. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington nonprofit organization that wants to scale back federal spending, especially spending that benefits the middle class, said that at first glance “this looks like a tax cut of a magnitude of about $5 trillion” in the first ten years.

  To get an idea of how much $5 trillion is, consider this: it’s more than all the individual income taxes the federal government expects to collect from everyone in the next three years. MacGuineas called such a large reduction in federal revenues “simply unimaginable.” She suggested this was a cynical ploy to win votes by selling voters a bill of goods. “Who doesn’t love a tax cut, especially if no one has to pay for it? This is a free-lunch mentality.”

  The conservative and antitax Tax Foundation ran the numbers. It estimated that Trump’s proposal was far costlier than MacGuineas imagined. Trump’s plan would add at least $10 trillion to the federal debt over ten years, the Tax Foundation estimated. This undercut Trump’s claims that as president he would reduce the federal government debt that he called dangerously high at $19 trillion.

  The nonpartisan Tax Policy Center analyzed the Trump plan using its computer model, which for years had generated predictions that later events proved to have been remarkably accurate. It calculated Trump would add $12 trillion to the federal debt in just ten years. Both organizations cautioned that because of missing details, their estimates could sign
ificantly understate how much extra debt the Trump plan would require.

  As the 2016 election drew near, Hillary Clinton challenged the believability of Trump’s tax promises, saying they were so much pie in the sky. She proposed lowering taxes on the 99 percent, especially families with children, while paying for the cuts by raising taxes on the top one percent. Trump ignored what she said and insisted that Clinton wanted to “double” income taxes. Clinton’s message did not inspire people feeling economic desperation after fifteen years of flat wages the way Trump’s did. And hers got little attention, in part because much as Trump stumbled in announcing his tax plan, she came across to many as offering so many specifics and qualifiers that to many voters it was just blah-blah-blah, her tax cut promise lost in a haystack of details.

  Despite this, Clinton’s comments and the calculations by experts in tax and economics had an impact on Trump. His promise of no income taxes on the first $50,000 for married couples was quietly reduced 40 percent to $30,000. Singles would get half that.

  Trump also delivered an unwelcome surprise to widowed, divorced, and never married mothers and fathers with dependent children. Congress calls them heads of households and gives them them tax breaks halfway between being single and married. Trump wanted to tax them as singles. That message appealed to religious and social conservatives opposed to unwed parenthood and divorce. (These supporters generally ignore the plight of single mothers who were widowed.) Getting rid of head of household status would mean higher taxes for families raising about 20 million of the nation’s 73 million minor children, my analysis of Census Bureau and IRS data found.

  Trump’s changes in his tax cut promises got little attention. They were seen as technical by the politics reporters who cover the horse race, not policy. Few reported that the reduced promise of tax-free earnings at $30,000 for married couples and half that for singles was not much of a change from existing law. Married couples already earned their first $20,800 income tax-free, singles half that. Trump successfully baited voters with a big promise, then switched to a much smaller one that few noticed.

  Reforming the tax system is not simple. Taxes at all levels are the single largest part of the American economy, more than a quarter of all economic activity. The thousands of favors Congress has bestowed, by its grace, on the political donor class add complexity. They also create concentrated economic interests vested in preserving their tax favors. Groups who are helped, or hurt, by changes end up in contention. That’s good for politicians raising donations for their next campaign, but not for sound tax policy.

  Changing the American tax system is somewhat like playing a game of pick-up sticks. The object is to remove one colorful stick at a time without any of the other sticks moving. Successfully removing a stick may win the game, but is just as likely to shift the dynamics of the whole pile with unpredictable results. Changing any one section of the tax code has similar interactions that may not be at all obvious, especially when made in haste. A poorly thought through plan to change the tax code could sink the economy. It could also open vast new opportunities for some of the richest Americans to escape income taxes, even if that was not the intention.

  Taxes don’t have to be as complicated as health care, the second largest part of the American economy. But until there is thoughtful and serious reform, that’s the way it is. (My next book will propose a completely new tax system using existing law, following ancient principles and eliminating income tax returns.)

  Trump counted on millions of voters not thinking about whether he actually had a tax plan or was blowing hot air. He counted on them only dreaming of a few more after-tax dollars in their paychecks. Then came the election results. Eight months after his inauguration, Trump had yet to deliver on his pledge to immediately introduce a comprehensive tax reform bill and get it signed into law within one hundred days.

  A few obstacles stood in the way of fulfilling that pledge. Trump didn’t have a bill. He did not even have a detailed memo that congressional aides could translate into legal language. His comments on tax policy were as fluid and changeable as those science fiction shape-shifters who assume whatever form advances their interests at the moment. Even Trump’s closest allies did not know just what he wanted. Based on his limited knowledge of tax law and economics, Trump himself may not have known what he wanted except to become a hero by arranging for others to pay less.

  Trump lacked estimates on how changes to tax law would affect government revenue. Indeed, he had no reliable estimates, just claims conjured from the ethers. Without such projections, practical and political problems stood in the way of tax legislation. Before taking up a bill, the tax writers on Capitol Hill should insist on analyses known as distribution tables showing how the tax savings pie would be divided among different income groups. Not knowing who would pay more and who would pay less made it hard for representatives and senators to decide where they stood. Any bill that increased revenue would be rejected out of hand by the anti-taxers among congressional Republicans. So would a bill that required more government debt, though the political red line there was much more flexible than on increasing government revenues as a share of the economy. Moderates in both parties would be troubled by a bill that gave little or nothing to the poor and middle class, as well as the prosperous upper-middle-class professionals whose labors earned them $100,000 to $400,000 a year. Liberals would fret over how big a slice of the tax-savings pie would go to the rich.

  Alongside this was the tricky issue of how interactions among the various provisions of the tax code would, or could, create unexpected winners and losers. Without details, no one could create rules to mitigate unintended consequences, an issue the Reagan team carefully studied in writing the 1986 Tax Reform Act, the last real overhaul of the federal tax system.

  Candidate Trump had simply evaded these serious issues by using slogans and grand claims and then deleting his tax plan from the campaign website. As they say of frauds posing as ranchers in Texas, Trump was all hat and no cattle. Like every con artist who sold people the earth, moon, and stars, when the time came to deliver the goods, he didn’t have them. Unlike con artists who can skip town with money fleeced from fools, or tell unhappy victims to sue him as Trump routinely did in his businesses, Trump has nowhere to hide in the glare of the White House. He also has nothing to show in terms of tax legislation.

  Trump had been in office more than five weeks when he spoke to a joint session of Congress. His remarks were delivered so smoothly and without the angry and negative bombast of his dreadful inauguration address that even some critics called the speech his finest hour and said that for the first time he seemed presidential. Like his campaign talks, though, Trump was long on promises and short on substance.

  That night Trump made no attempt to sell the tax cuts that had been central to attracting voters. There was no soliloquy on the benefits of his tax plan, no marshaling of even a few powerful facts to build a case for lowering tax rates. No claims that lower taxes would mean more jobs and better pay. There was not even a reminder of the campaign declarations that combining universal tax cuts with simplification and fairness would double the rate of economic growth. Instead Trump said only this: “We will provide massive tax relief to the middle class.”

  Trump had not forgotten his campaign promises. Earlier that day on Fox News he was asked about lower tax rates generating less revenue. Trump, in full con artist mode, waved the problem away. “I think the money is going to come from a revved-up economy,” he said. “I mean, you look at the kind of numbers we’re doing—we were probably G.D.P. of a little more than 1 percent, and if I can get that up to 3 or maybe more, we have a whole different ballgame.”

  While he had no legislation, the number of tax policy specialists finding fault with his proposals continued growing. The idea that tax cuts produce faster economic growth was ridiculed so widely that it was even challenged on Fox News.

  Then there was the fairness problem Trump created by promising explicitl
y and repeatedly that simplification and fairness went hand in hand. Trump promised to slash the top marginal income tax rate by as much as 62 percent, while the middle-class tax rate cuts would at best be slight trims. Today, some Americans earn annual incomes of a billion dollars or more and hundreds of thousands make a million dollars or more. But the top tax rate Trump proposed was expected to retain existing law, meaning it applied at less than a half million dollars of annual income. That meant a married couple who both worked all year to make $500,000 would be taxed on most of their income at 25 percent and on their last dollars at 35 percent, while those harvesting thousands of times that much income would pay just 15 percent on income from capital rather than labor. Since 15 percent is less than half of 35 percent, the difference between labor and capital income tax rates would create lucrative incentives for accountants and lawyers to devise ways to escape the higher tax rate. In the past this has been achieved by converting salaries taxed at higher rates into what would appear to IRS auditors to be capital gains taxed at much lower rates.

  Some critics noted that the Trump-Pence campaign website materials on taxes, read literally, proposed raising the income tax rate of the working poor and marginal small businesses by half, from a 10 percent tax rate to 15 percent. That surely was not Trump’s intent, but it showed that on tax policy, as well as facts and logic, Trump was anything but the world’s greatest expert. (The campaign tax promise was deleted from the website after the election.)