Fourteen million people watched the Republican presidential debate last week and many agree the most substantive part of the evening was discussion of tax policy. Governor Kasich vociferously condemned the tax plans put forward by Mr. Trump and by Dr. Carson as “fantasy.”
Is Governor Kasich right? Are Trump and Carson promising the impossible? Although the moderators focused on the math, an equally important question is whether it’s politically possible for the next President to implement the kind of dramatic tax reform that Trump and Carson are proposing.
Good tax policy encourages people to produce, save, and invest in the economy. It should expand the tax base so that everyone contributes according to their means, and it needs to raise enough revenue to balance the budget and keep the country out of debt. Both Trump and Carson’s plans claim to achieve these goals.
But even if a tax proposal looks good on paper, it may be politically impossible. Presidential candidates not only have to propose a realistic tax plans, they also need to tell us how they will get Congress to implement it.
Moderator Becky Quick told Dr. Carson point blank that his tax proposal would create a one to $2 trillion annual deficit. Carson explained that a 15% tax on $18 trillion (U.S. GDP) would generate $2.7 trillion in revenue, falling $.8 trillion short of federal spending in 2014. Dr. Carson said he would close this gap by taxing corporate profits and capital gains and cutting federal spending.
But Carson’s numbers don’t add up — though they could if the flat tax were 18-20% instead of 15%. Capital gains are already included in personal income, which means Carson is proposing a double tax. Furthermore, not all GDP is personal income. In 2014 personal income was closer to $15 trillion, meaning income tax revenue under Carson’s plan would leave a gap of $1.2 trillion. Corporate income taxes were $321 billion in 2014. That still leaves almost a trillion dollars of annual government spending to cut, if he stands by his 15% rate.
But other than suggesting too low of a rate, Carson’s proposal seems like good tax policy. It broadens the tax base and doesn’t favor one activity over another. It could balance the budget. And most importantly, it would promote growth by removing disincentives for people to work, save, invest, and produce more.
Unfortunately, as appealing as the simplicity and fairness of Carson’s tax proposal may be, Congress is not likely to support it. No Democrat will touch it with a ten-foot pole because it violates their dogma of progressive income tax rates. And everyone in Congress will be wary of closing exemptions that benefit their constituents and wealthy corporate donors. Even someone powerful as the President of the United States cannot unilaterally implement a new tax code or make Congress do so.
Instead of a flat tax rate, Trump suggests a three-tiered tax rate. He says that a major benefit of his plan is that it “removes nearly 75 million households” from the income tax rolls. Although this might save on paperwork, it’s not good tax policy to reduce the tax base by increasing the number of people who don’t pay income taxes. A three-tier tax plan would also discourage work by slapping people with higher tax rates if they succeed in increasing their incomes.
But the biggest problem with Trump’s plan is that it would dramatically increase U.S. debt. His campaign claims that all of these tax cuts will be offset by closing loopholes and repatriating corporate profits. But according to the Tax Foundation, Trump’s tax plan of huge tax reductions for almost everyone will create a $10 trillion hole over ten years. That strikes me as fantasy and completely politically infeasible.
Carson and Trump were criticized for their fantastical tax plans. We can see that Trump’s plan fails to meet mathematical plausibility. And Carson’s proposal, though it could balance the budget and promote growth, has little chance of being supported by Congress. Yet none of the other candidates’ tax plans, except for Rand Paul’s, is revenue neutral over a ten-year period, even after accounting for the additional economic growth they claim their plans will create. This is politics as usual — tell people what they want to hear: “I will lower taxes and cut spending, but you get to keep every government program or benefit you like…”
That is the real fantasy our country faces.