Repeal and replace the Trump tax cuts
Bad news for shopaholics already looking forward to having some extra cash for Black Friday: There is a zero percent chance President Trump will cut middle-class taxes by 10 percent after the November elections. And if you just read the preceding sentence, then you've probably given the idea about as much thought as Trump did before blurting out that $2 trillion promise.
Congressional Republicans were sure surprised — maybe because there are no plans on Capitol Hill to make Trump's middle-class tax pledge happen. Trump Tax Cut 2.0 is in no way a serious policy proposal. It's total vaporware.
Even so, it's meant to address a serious political problem: Republicans aren't getting much electoral oomph from the centerpiece of Trumponomics. And they know it. A recent survey commissioned by the Republican National Committee and obtained by Bloomberg News found that by a margin of 61 percent to 30 percent, respondents said the 2017 tax law benefits "large corporations and rich Americans" over "middle-class families." That finding helps explain why Trump emphasized that this new tax cut idea of his was for "middle-income people … not for business."
But there's a problem. While such a tax cut might not be for businesses, it probably wouldn't be just for the middle class, either. Cutting middle-income tax rates means that all the income earned at those levels is subject to lower rates — even income earned by millionaires and billionaires. Recall that Trump's Tax Cut and Jobs Act slashes all tax rates, including those at the top. And it's those cuts — along with the business tax cuts — that have apparently helped persuade most voters that they're not benefitting much or really at all. (That, even though all income groups are getting tax cuts this year — assuming gains aren't offset by the import tax hikes of the Trump tariffs.) Meanwhile, Democrats are taking advantage of this voter perception by promising to repeal Trump's tax cuts and replace them with cash payouts for the poor and working class. And since the GOP didn't much care that its tax cuts would worsen federal debt and deficits, Democrats aren't too concerned that their spending plan could do the same.
All this was easily predictable and avoidable for Republicans. Ideally they should have proposed a tax cut that did three things: boost business investment, obviously increase worker take-home pay, and pay for itself. Sure, that would have meant making some hard choices, such as not cutting top income tax rates for the wealthiest Americans in a time of rising debt and increased inequality. Indeed, those personal tax cuts are the ones that do the least for long-term economic growth while also generating the most red ink.
Things could have been different. For instance: A better way to provide middle-class tax relief would have been through a cut in the payroll taxes used to fund Social Security and Medicare. Some two-thirds of U.S. households with annual incomes below $100,000 pay more in payroll taxes than income taxes. A two percentage point reduction in total payroll taxes would have increased the after-tax income of a household with $50,000 in earned income by $1,000. That's a nice chunk of change. And a payroll tax cut could have been paid for by limiting it to middle-class households and curbing tax breaks that mostly help wealthier Americans. Moreover, lost revenue from the deep cut in corporate taxes — to 21 percent from 35 percent — could have been offset by higher capital gains taxes. Or perhaps Republicans could have chosen less severe corporate rate cuts in favor of permanent full expensing of new capital investment.
To be clear: Cutting the uncompetitive corporate tax rate was a good idea. Not paying for the rate reduction certainly wasn't.
Like I said, hard choices. But that's what serious governments do when their debt levels have doubled over the past decade and are on track to continue ballooning. Of course, the Trump tax cuts are hardly the final word on tax reform. The personal rate cuts are due to expire in 2025, while the temporary expensing provision begins to phase out at the end of 2022. At the same time, budget deficits will continue to worsen, due in part to the original Trump tax cuts. A new forecast from Goldman Sachs predicts the federal budget gap to reach $1 trillion (4.7 percent of GDP) in 2019, $1.1 trillion (5.1 percent) in 2020, and nearly $1.3 trillion in 2021 (5.5 percent).
Maybe it's time for Republicans to think about repealing and replacing the Trump tax cuts.