- The American Conservative - http://www.theamericanconservative.com -

Trump’s Tax Plan Leaves the Swamp Untouched

President Trump’s tax plan gives those of us with long memories a strong sense of déjà vu. We’ve seen this play before, and the ending is inevitably modest: a few of the pieces of a horrendously complex, unfair tax system are moved around, victory is declared, and the creatures of the Swamp—those self-serving elites that benefit from the complex, unfair monstrosity—continue raking in their billions of dollars in fees while the rest of us are burdened with billions of dollars in tax-preparation costs.

The opening act of this tax-reform play always starts with a claim that by golly, this time we’re really going to simplify the tax code. Trump’s plan calls for reducing the number of tax brackets and eliminating all deductions other than those for charity and mortgage interest; by way of compensation, the standard deduction will be doubled.

Such changes make for catchy headlines, but the reality is the tax code will still run to thousands of pages. The Tax Foundation explains [1] the three layers of compliance complexity:

Simple changes like reducing the number of tax brackets skirt the core problem with the U.S. tax system: the entire tax code is little more than a clearinghouse of political bribes paid for with tax breaks and a complexity thicket that requires the services of legions of accountants, tax attorneys, software coders, and specialists in tax-avoidance strategies.

This clearinghouse and complexity thicket are intrinsically unfair, as insiders and the super-wealthy can avoid taxes via political influence and offshore tax havens. This systemic unfairness erodes the social contract’s key compact: that the playing field will be kept more or less level for all participants.

But the U.S. tax system is anything but level. The Institute on Taxation and Economic Policy (ITEP) recently published [2] an analysis of the corporate taxes paid by Fortune 500 companies over the past eight years. Consistently profitable companies paid a federal tax rate of around 21 percent, considerably lower than the nominal corporate tax rate of 35 percent. But 18 profitable companies paid no federal taxes over the eight years, and about 50 corporations paid rates of 10 percent or less.

Immensely profitable corporations such as Apple [3] have mastered the offshore tax-avoidance game. Others persuade (impolite term: bribe) members of Congress to include obscure tax breaks tailored to them in legislation.

So the most successful at gaming the system pay near-zero rates (saving tens of billions of dollars) while the chumps pay the top rate.

There’s another systemic source of unfairness in the tax code: the gap between the high rates on earned income (wages and salaries) and the much lower rates on unearned income—what we might characterize as income generated by capital rather than labor: rents, capital gains, and so on.

If you manage to earn $500,000 in wages, most of that income is taxed at 33 percent, and the income above $415,000 is taxed at 39.6 percent. (Trump’s tax proposal calls for a top rate of 35 percent.) Meanwhile, the top rate for long-term capital gains is 20 percent. Over time, that 15-point difference adds up.

In effect, the rich get richer because most of the lower-tax-rate unearned income flows to them.

The concentration [4] of unearned-income-producing wealth in the U.S. is remarkable. In 2016 the Congressional Budget Office (CBO) reported that the top 10 percent of U.S. households held 76 percent of all private wealth. The bulk of the sources of unearned income are owned by the top 10 percent: stocks, bonds, trust funds, business equity, and non-home real estate.

Unearned income also avoids the 15.3 percent Social Security and Medicare payroll taxes [5] (half paid by employers, half by employees). Self-employed taxpayers pay the entire 15.3 percent, and so all their earned income above $37,650 is taxed at a rate of 40.3 percent or higher: 25 percent federal income tax and the 15.3 percent payroll taxes. That 40 percent is double the top tax rate on unearned income.

Those with earnings above $118,500 no longer pay the Social Security tax. According to the U.S. Census Bureau [6], 80 percent of all households earn less than $117,000 a year, so the vast majority of wage earners pay the full payroll tax rate on all earnings.

So while the top income tiers famously pay [7] most of the federal income taxes (the top 1 percent pony up about 37 percent of the total), the highly progressive income taxes are slightly less than half of all federal tax revenues, while highly regressive payroll taxes make up roughly a third of federal tax receipts.

In this larger context, how much impact will Trump’s signature tax cuts on the corporate rate (from 35 percent to 15 percent) or on the top earned-income rate have on the inequities of the tax system?

A lower corporate tax rate that was applied more uniformly would certainly reduce the necessity of costly tax avoidance schemes—but the current Swamp enables some companies to pay near-zero, which is a lot less than 15 percent.

As for the modest reduction in the top earned-income bracket: as we’ve seen, the bulk of the taxes paid by the bottom 80 percent are payroll taxes on earned income, and the unearned income flowing to the wealthiest 10 percent is taxed at a much lower rate than the combined payroll-income tax burden on wage earners.

This systemic unfairness of the status quo is one reason why Trump was elected: the protected few (to use Peggy Noonan’s phrase) are benefiting at the expense of the unprotected many. The only meaningful tax reforms—the elimination of loopholes, offshore tax havens, and the congressional privilege of rewarding cronies with obscure tax breaks buried in legislation; radical simplification of the code and a realignment of the asymmetry between the taxes paid on earned income and unearned income—are a political impossibility, as the protected elites have a stranglehold on the machinery of governance.

That said, it would have been refreshing if Trump’s team had called for a massive house-cleaning of a wildly unjust tax code, and a draining of the particularly fetid tax-avoidance swamp.

Charles Hugh Smith is the owner/writer of the oftwominds.com blog and has written 11 books on our economy and society, including A Radically Beneficial World: Automation, Technology & Creating Jobs for All.

29 Comments (Open | Close)

29 Comments To "Trump’s Tax Plan Leaves the Swamp Untouched"

#1 Comment By Gregory On April 27, 2017 @ 10:52 pm

Good to see Charles having a voice here at TAC.

There’s another systemic source of unfairness in the tax code: the gap between the high rates on earned income (wages and salaries) and the much lower rates on unearned income—what we might characterize as income generated by capital rather than labor: rents, capital gains, and so on.

This more or less summarizes the state of taxation in America. Working for a living is for suckers.

#2 Comment By ADC Wonk On April 27, 2017 @ 11:47 pm

Sigh . . . same old Trump. After flip-flopping on NAFTA, NATO, Chinese currency, etc., and hiring more top level-appointees from Goldman-Sachs than any other President . . . are we surprised by what they all hurriedly produced because they want something done by the 100th day?

#3 Comment By Kurt Gayle On April 28, 2017 @ 9:03 am

Thank you, Charles Hugh Smith, for writing the plain truth about the President’s tax plan.

The tax plan is a bitter pill for those of us who are Trump supporters.

But we need to keep focusing on what is true. And the truth is that the creatures of The Swamp are still very much in control of an unfair tax system.

#4 Comment By Johann On April 28, 2017 @ 9:07 am

I agree with much of the article, but disagree with the objection to the capital gains tax rate. Capital investments are at risk of a loss as well as a gain. If the taxes are raised on capital gains, the risk/reward calculations will result in fewer investments. And another thing. Its totally dishonest for the government to tax capital gains on long term holdings of real estate or any other very long term investment without taking inflation into account. Think about it. If you own a home for let say 40 years, when its sold, almost all of the sales price is profit, since what you paid 40 years ago is almost nothing in today’s prices. Raising the capital gains tax rate will hurt a lot more than just rich people.

#5 Comment By SDS On April 28, 2017 @ 9:32 am

It would have been refreshing; but it appears
P.T. BARNUM was right, again…

Mr. Trump apparently had no intention of fulfilling any of the lofty promises he made in campaigning; as he doesn’t in his own business dealings….

WE were just too desperate to recognize what was right in front of us…..

SAD!

#6 Comment By Sean Nuttall On April 28, 2017 @ 9:56 am

Amen. However, to think that Trump cares one iota for working people is pure self delusion.

#7 Comment By Elsie Gilmore On April 28, 2017 @ 10:24 am

It is good to see that there are actually some real conservatives left in this country. I hope next year’s elections reflect the current discontent and the need for more public servants to be elected and fewer politicians.

#8 Comment By icarusr On April 28, 2017 @ 10:38 am

“This systemic unfairness of the status quo is one reason why Trump was elected: the protected few (to use Peggy Noonan’s phrase) are benefiting at the expense of the unprotected many.”

Stuff and nonsense. The party that nominated Trump is one of the key reasons for the “systemic unfairness”. Whatever Trump was elected for, this was not it.

The real question is why does anyone think that Trump meant it when he said he wanted to “drain the swamp” – whatever that means – or that what he might have meant about it (and it is questionable he had any real notion beyond the slogan) is what his supporters thought he meant. What we are seeing from poll after poll is that his supporters CHANGE their positions depending whether Trump holds them; Trump was not elected as an embodiment of an idea, any idea, or a policy, any policy; Trumpism is about the pose of the man, nothing more and nothing less. If he comes up with a tax plan that dumps all of the tax burden on the very voters that elected him, they will find a way to rationalise this just as surely as they would support him if he shot a man in the middle of Fifth Ave.

Trump might not know much; he knows his marks supremely well.

#9 Comment By Paul De Palma On April 28, 2017 @ 10:57 am

This is the clearest short piece I’ve ever read on Trump’s tax proposal and the current system. Thanks.

#10 Comment By grumpy realist On April 28, 2017 @ 11:53 am

Bravo for this article. We’re getting crony capitalism and gaming of the system by rent-seekers on both left and right. Where is a political party that is going to actually stand for those of us who don’t have power and aren’t trust fund babies?

#11 Comment By Kevin On April 28, 2017 @ 11:53 am

“Think about it. If you own a home for let say 40 years, when its sold, almost all of the sales price is profit, since what you paid 40 years ago is almost nothing in today’s prices. Raising the capital gains tax rate will hurt a lot more than just rich people.

For house sales, the first half million are excluded from capital gains taxes. Median house price in the US is 200K. There is no problem here whatsoever. This objection to capital taxes is from the same bag of tricks as “estate taxes kill grandpa’s family farm!.” They don’t unless that family farm is the basis of an agro-industrial empire.

#12 Comment By One Man On April 28, 2017 @ 12:19 pm

Johann, the first $500,000 of profit on a sale of residence is tax-free for married couples, I believe. Someone can correct me if I’m wrong.

#13 Comment By Edward On April 28, 2017 @ 12:22 pm

“There’s another systemic source of unfairness in the tax code: the gap between the high rates on earned income (wages and salaries) and the much lower rates on unearned income—what we might characterize as income generated by capital rather than labor: rents, capital gains, and so on”.
No wonder the rate of return on capital has exceeded the rate of growth of GDP since the 1980s (a major cause of inequality).

#14 Comment By Student On April 28, 2017 @ 2:42 pm

It is not just house prices that inflate. Financial assets do also. Taxing them on the
nominal gains at ordinary rates, without correcting for inflation, is grossly unfair,as in many cases would mean taxes owed on losses.

But the author also fails to observe that the
tax plan provides special treatment for partnerships, those self employed, and for
private companies. For these, the top rate is 15%, essentially dividing people into
wage slaves and the privileged, undertaxed elite.

Mnuchin assured that the egregious carried interest loophole would be closed. Great.
Except it will be eliminated by reducing the
taxation of these monies to 15%.

This plan, like the RINOcare bill pushed by
Speaker Ryan, is an example of either lax
thinking, or of perhaps of swamp behavior.

#15 Comment By Johann On April 28, 2017 @ 3:37 pm

Thank you those that corrected me on the exemption of capital gains on houses. My experience has been with farmland. I was not aware of the exemption for house sales.

#16 Comment By George Marshall On April 28, 2017 @ 3:48 pm

Of course, it always depends on whose ox is being gored, but eliminating almost all deductions in return for an increase in the standard deduction, helps me not at all. I usually itemize and last year had: medical, charity, mortgage interest, state income tax, and real estate tax deductions. I expect my taxes to go up under this proposal, unless the details of which there aren’t any, are very different. So much for tax relief for the middle class.

#17 Comment By philadelphialawyer On April 28, 2017 @ 3:52 pm

icarusr:

“The party that nominated Trump is one of the key reasons for the ‘systemic unfairness.'”

Yeah, it is great to see the author here calling for what amounts to the Democratic view of progressive taxation. Basically, what Mr. Smith proposes tracks HRC’s tax plan issue by issue.

[8]

#18 Comment By JonF On April 28, 2017 @ 4:09 pm

Re: Taxing them on the
nominal gains at ordinary rates, without correcting for inflation

Other than indexing the tax brackets (which applies to all income) we tax wages on inflationary gains too. The government’s bills also increase due to inflation so why shouldn’t its revenue?

#19 Comment By Ken T On April 28, 2017 @ 5:24 pm

“Capital investments are at risk of a loss as well as a gain.”

I always have to laugh whenever someone trots out this old chestnut. So what? If there is a loss, then there is no taxable gain. And any loss on one investment is subtracted from any other investment gains. And the degree of “risk” in any investment is balanced off by the expected “return” if it does pay off as expected – the greater the risk, the bigger the return. So the risk factor has already been accounted for. The bottom line is, income is income – no matter where it came from.

#20 Comment By Laualie On April 28, 2017 @ 5:55 pm

I have to wonder about the comment made that increased taxes on capital gains will over-stifle investment. An increase will likely have an impact but up to a certain point, it will be less than the current cost to revenue/economy. The question is what point will an increase be too much – and push away those investment dollars to the next best option. Is there something magic about 15% or is there still room above that point?

#21 Comment By Lee On April 29, 2017 @ 2:09 am

So Trump can survive dealing with the Construction Industry, and Mafia, yet he cannot survive the swamp that is embedded in Washington, DC…

Hopefully, the allegedly frozen poles sheds enough water to sink that freaking place soon.

#22 Comment By Johann On April 29, 2017 @ 10:20 am

When it comes to investments, one can offset gains with a loss, but one can most certainly have net losses for a given year. That net loss can be carried over to subsequent years, but the losses may continue. There are risks with investments. To say there is no downside or increased risk with higher capital gains taxes is to be a math denier. Higher taxes increases investment risk.

#23 Comment By Jim Houghton On April 29, 2017 @ 6:32 pm

Factoid that may or may not be meaningful, but still provokes some thought: America has more tax-prep professionals per 1,000 citizens than Indonesia has doctors.

#24 Comment By Brian Backes On April 29, 2017 @ 8:53 pm

In my policy reading I’ve never come across a proposal to map the graduated-progressive aspect of our income tax onto the domain of capital gains taxation.

Would graduating capital gains, perhaps with different steps and magnitudes, address concerns of fairness? Joe Sixpack might get sledgehammered at 10%, whereas Daddy Warbucks might take an, say, 33% beatdown.

More abstractly, why can’t we disaggregate that great unitary lump we call ‘capital gains’, then take a piecewise approach (at least conceptually)? We do this all the time in science and engineering to great effect. Why can’t capital gains taxation policy experts employ this method.

#25 Comment By Adriana I Pena On April 30, 2017 @ 12:36 am

SDS says

It would have been refreshing; but it appears
P.T. BARNUM was right, again…

Mr. Trump apparently had no intention of fulfilling any of the lofty promises he made in campaigning; as he doesn’t in his own business dealings….

WE were just too desperate to recognize what was right in front of us…..

SAD!

SDS, desperate or not, you should have remembered one thing.

Anyone who dealt with him and trusted him got screwed.

Why did you think he would deal differently with you?

#26 Comment By Ken T On May 1, 2017 @ 12:56 pm

Johann: “Higher taxes increases investment risk.”

No, it does not. Capital gains taxes are calculated after the fact – that is, only after the investment has been sold. If there has been a net loss, then there is no tax. If there has been a net gain, then the tax is applied to that portion of the investment that has already been taken as profit, and is therefore no longer at risk – it has been converted into income, and is no longer an investment. The presence or absence of capital gains tax has no effect whatsoever on the degree of risk.

If you want to make the argument that there should be some tax incentive to encourage productive investment, then the place to put that incentive would be at the front end – give some sort of credit or deduction for money that gets put into the investment. That money, and only that money, can be said to be “at risk”. Profits, once taken out of the investment, are not.

#27 Comment By MEOW On May 1, 2017 @ 2:18 pm

For starters let’s replace the Fed with a PC that does not have the ability to make discretionary monetary policies (a la Milton F). Then make presidential candidates sign binding agreements that if elected they will honor election pledges or step down. Donald?

#28 Comment By Johann On May 2, 2017 @ 9:24 am

Ken T, with your logic, the capital gains tax could be 100% and people would still invest. But we know they wouldn’t. Sometimes an absurd example will reveal a logic flaw.

#29 Comment By Ken T On May 2, 2017 @ 2:55 pm

Johann:

Well, I certainly agree that your “example” is absurd. The point is that capital gains, once realized, are income. No different than any other income. No more “at risk” than any other income. And therefore with no logical reason to be treated differently than any other income.

As long as your investment capital is “at risk” – there is no taxation whatsoever. Zero. You could have bought Apple back in 1984 and, if you never sold any of it, be holding on to gains of over 20,000% – and you still would have paid exactly Zero tax on that – because it is still theoretically “at risk”. But once you start selling those shares, you start converting that gain into income, and it is no longer at risk. So if you sell enough to take $1000 a year in income, then why shouldn’t you be taxed on $1000 of income? Or, if you sell enough to take $1,000,000 a year in income, why shouldn’t you be taxed on $1,000,000 of income? Even if the stock were to crash the day after you complete the sale, you had no risk. There is no way for anyone to take back any of that gain, so how is it “at risk?