Trump Tax Plan a Triumph of Showmanship Over Common Sense

Donald J. Trump, the Republican presidential candidate, outlined his tax plan on Monday at a news conference in New York.

A mercurial candidate needs a mercurial tax plan. Donald J. Trump’s proposal to overhaul the tax code fits the bill. But it would hardly raise the revenue needed to pay the nation’s invoices.

Mr. Trump is following the advice of the Hollywood screenwriter William Goldman to give the people what they want, just not the way they expect it. His tax plan gives the people the huge tax cut they want, paid for by mere rhetoric.

Mr. Trump revealed his tax plan on Monday with flourish and sleight of hand, exaggerating its punitive impact on the rich. In fact, the plan would greatly reduce the taxes of most business owners, bankers, lawyers and other high-income professionals.

The plan would reduce just about everyone’s taxes, with perhaps the singular exception of a few investment fund managers who might face a slight increase in taxes.

The plan contains a seemingly random borrowing of ideas, some good and some bad, with no partisan pattern.

Mr. Trump’s plan would exempt 75 million households from the income tax: anyone who makes less than $25,000 annually or married couples who jointly earn less than $50,000.

Mr. Trump would lower the top income tax rate to 25 percent from the current top rate of 39.6 percent.

Most strikingly, he would reduce the corporate tax rate to 15 percent from 35 percent. And he would extend this rate to businesses that operate in partnership or sole proprietorship form. Lawyers, doctors, accountants and other professionals who often pay tax at marginal rates surpassing 40 percent under current law would see enormous tax savings.

The plan would also retain the capital gains preference and repeal the estate tax.

The plan relies on the magic of supply-side economics for its claim of revenue neutrality. Mr. Trump picks out a series of mostly sensible ways to help pay for a tax cut, including limitations on itemized deductions, limitations on interest deductions and closing the carried interest loophole. But the revenue raised from these base-broadening proposals would hardly cover the revenue lost from reductions in top rates.

His business tax proposal is not quite as crazy at it seems. He proposes a tax rate of 15 percent on both corporate and partnership business income, far below the top rates of 35 percent and 39.6 percent under current law. But the patchwork of available deductions, exemptions, credits and deferral mechanisms results in an average effective tax rate of 25 percent, or lower, for most businesses.

Mr. Trump trumpeted the punitive effect his plan would have on fund managers. But just how this low business tax rate would apply to fund managers is a little unclear. Under current law, most fund managers pay tax at the lower capital gains rate of 20 percent on their share of a fund’s profits, known as carried interest. Under Mr. Trump’s plan, fund managers would pay tax at a top rate of 25 percent, a small increase.

But fund managers also pay tax on some of their income, such as management fees and short-term gains, at a top rate of 39.6 percent. Because their fee income is earned through a business, that rate would be cut to 15 percent under Mr. Trump’s plan. Funds would quickly restructure carried interest from a partnership allocation to an incentive fee to qualify for the low 15 percent rate.

Mr. Trump would help pay for the rate cuts with a one-time 10 percent tax on the deferred foreign earnings of United States multinational corporations, and he would end the ability of American businesses to defer income in the future.

This approach roughly tracks the most recent budget proposal from the White House. Many Republicans in Congress, on the other hand, would prefer to shift to a territorial system, which exempts foreign income altogether. Mr. Trump’s proposal to broaden the base and lower the rate makes more sense.

Still, the plan relies on vague assertions without evidence that lower tax rates would provide a “tremendous stimulus” for the economy, “significant” gross domestic growth and a “huge” number of new jobs.

Mr. Trump’s plan includes some sensible suggestions to broaden the tax base and reduce rates. If it included more specific loophole closers, or a progressive consumption tax or value added tax to raise revenue, it would be treated as a serious proposal and an act of leadership. Instead, it will be dismissed in tax policy circles as just another exaggerated claim of a carnival barker.

Mr. Trump’s campaign did not immediately respond to a request for comment.

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