Analysis of Donald Trump’s Individual Tax Plan

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Disadvantages

1) Sufficiency and Revenue effect

Trump’s plan, which has huge tax cuts for business and the rich, emphasizes growth. It would inject $4-6 trillion into the economy over 10 years, which means the Trump plan would reduce federal receipts by $4-6 trillion. The Trump’s plan would require unprecedented spending cuts to avoid adding to the federal debt.

The government puts money into the economy by means of spending and tax cuts, and removes it by taxation. Sometimes the government wants to remove money to prevent asset bubbles and redeem the currency. Tax cuts are subject to arbitrary congressional budget rules that say that every tax cut must be offset by a tax increase of spending cut somewhere else.

On the other hand, tax cuts would have to be enormous to have any macroeconomic effect on a $16-18 trillion economy. His first plan proposed even larger cuts. If spending were not cut and the growing deficits ultimately led to tax rate increases, which will not boost economic growth but shrink it. Deficits will also negatively affect the prices of debt securities.

2) Equity and Distributional Effects

It is not vertically equal under Trump’s plan. As we analyzed before, the Trump’s proposal would reduce taxes throughout the income distribution. Trump’s corporation tax cut plan gives rich people opportunity to transfer their money to “pass-through” entities like partnerships, sole proprietorship, and S corporations, which don’t pay corporate taxes and instead distribute their profits to their owners, who then pay normal income taxes on them.

So, the rich people would pay a mere 15 percent rather than pay a top rate of 39.6 percent, or even 33 percent after Trump’s cuts. Combining the individual tax cut with the corporation tax cut, the richest top 0.1 percent would get a tax cut worth more than 14 percent of their income, on average. That's $1.1 million each. The lowest quintile would only get $110 on average. The tax cut is not equally distributed.

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Also, the plan would eliminate the federal estate tax entirely. Only the wealthiest taxpayers (less than 1 percent) now pay that tax. It would lead to an even greater concentration of wealth in the U.S.

On the other hand, US income taxes are progressive. Spending is not, so the system is not redistributive. And as the individual discussion shows, it would not put a lot more money in the hands of people with a high marginal propensity to consume. So even if enhanced growth were achieved, it would not be evenly distributed.

THREE. Concerns and Summary

As we discussed above, Donald Trump’s tax plan have several pros and cons. There are some obvious advantages but at the same time, they may be offset by potential negative effect. To sum up, we should concern some specific aspects. First, it is not for sure that the large amount tax cut would finally boost economic growth. Second, it is not clear how much money the government could save to respond to the reduction of revenue. If large deficits come up, the economy may be hit. Third, how many high-level income people will choose to use “pass-through” entities to reduce their tax and to what extent the decrease will be. If the amount and percentage of tax cut of the rich people is higher than expected, the government may have to make some limitations. All things have two sides. There is no doubt that Donald Trump’s tax plan will be put into practice. But at the same time, the government are supposed to notice and take actions to minimize the potential risk which may lead to unexpected result.