TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, October 6, 2017

Kleinbard: Only Jay Gatsby Could Love The Trump Tax Plan

Vox op-ed:  The GOP Says Its Business Tax Plan Will Help Workers and Small Businesses. It Won’t.
Instead, It’s a Gift to People With Lots of Capital, by Edward Kleinbard (USC):

To understand the business tax provisions in the Trump tax proposals, begin with F. Scott Fitzgerald’s insight that the rich are different from you and me — they have more money.

In particular, they have more capital. (Ever polite, economists call piles of money that have been invested “capital.”) Business tax reform really is an exercise in how we should tax capital income — that is, returns on investments. And because the rich have lots more capital than do you or I, the benefits of the multitrillion-dollar business tax cuts proposed by the Trump administration’s tax “framework” necessarily will be vacuumed up by the most affluent Americans. Business tax reform has only a modest connection to the economic future of working stiffs, and the small connection that does exist is a second-order effect.

The Trump framework offers two critical tax cuts for businesses and their owners: First, it reduces the tax rate on corporate income from 35 to 20 percent; and second, it caps the taxes imposed on owners of “pass-through” businesses like partnerships and S corporations, by creating a new 25 percent tax bracket for those owners’ pass-through income.

(As Republicans never tire of pointing out, regular corporations and their shareholders in theory are subject to double taxation — once when the income is earned by the corporation and again when it’s distributed as taxable dividends to individual shareholders. This rule, however, is honored almost exclusively in the breach. By contrast, the owners of “pass-through” entities are taxed directly on the income of their pass-throughs. Most privately owned companies are organized as pass-throughs; virtually all publicly traded companies are taxed as corporations.)

The nonpartisan Tax Policy Center estimates that the changes to corporate and pass-through tax rates, plus some ancillary rules, will slash tax collections by more than $2.6 trillion in forgone revenue over the next 10 years. By contrast, the purely individual provisions in the Trump plan are estimated to raise about $500 billion in taxes from all of us over the same period. So, viewing things in the aggregate, the overall tax cuts promised by the framework are entirely a story about the business tax side of things: The individual side is a net tax hike. More particularly, the overall impact of the tax framework is a story about who benefits from business tax cuts. ...

[I]t might be suggested that only envy can explain my preoccupation — and that of other commentators — with how generous the framework’s business tax cuts are to the most affluent Americans. So long as low- and middle-income taxpayers are also better off, who cares about the largesse at the top? The answers are, first, millions of ordinary Americans in fact will be worse off — as the Tax Policy Center’s preliminary analysis makes clear.

And second, we all have a vital interest in the financial stability of the United States. The tax framework will produce a multitrillion-dollar increase in our deficits by forgoing tax revenues in order to cut taxes on the very must affluent. This spurt in deficits will impede, not accelerate, growth, by increasing the interest rates paid by US businesses. It also will make our ability to respond to the next recession that much more precarious. So, yes, in this case, all of us have a vital interest in not giving away the store to some of us.

To paraphrase Fitzgerald, the ownership of business capital and business capital income is what distinguishes the rich from you and me, and for this reason, the lion’s share of the Trump framework’s multitrillion-dollar business tax cuts cannot help but be captured by the most affluent Americans. This is a tax proposal only Jay Gatsby could love.

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