Trump's Misguided Approach to Tax Reform

(Bloomberg View) -- President Donald Trump's much-anticipated tax proposal is true to his style of governing: bold and vague. More an agenda for discussion than the promised blueprint, it espouses some appealing principles, but the chances that the administration might mold them into an effective reform seem slim.

The proposal aims to cut tax rates and greatly simplify the code -- worthy goals. The U.S. corporate tax rate is one of the highest in the world and ought to be cut. And no American needs persuading that the personal-tax system is too complicated.

But a plan based on the president's bullet points would involve a big increase in public borrowing, which would be unwise. In addition, starting from here, the political maneuvering needed to get it passed would cancel out much of the benefit.

Trump says his tax cuts would be the biggest in U.S. history. The top marginal rate would fall to 35 percent; the standard personal deduction would be doubled to $24,000; the standard corporate rate would drop from 35 percent to 15 percent. The revenue to pay for these cuts would come, he says, from faster economic growth and from measures to broaden the tax base. Most personal-tax deductions would go -- including the deduction for state and local taxes, though the deductions for mortgage interest and charities would stay.

Unfortunately, that acceleration in growth can't be relied on. The economy is already at or close to full employment. The government could and should aim to spur growth by raising productivity -- a long-term endeavor, in which tax reform certainly ought to play a part -- but not by boosting demand to raise employment. The time for that has passed.

Without a surge in growth, the broadening of the tax base that Trump is advocating won't bridge the revenue gap. By itself, his cut in corporate taxes would cost some $2.4 trillion in lost revenue over the next decade.

Good tax reform also aims for certainty and simplicity. Trump's plan is a failure on both those counts. By alienating Democrats and fiscally responsible Republicans, his proposal won't get the supermajority it needs in the Senate to be made permanent. If it passes with just a simple majority, it would be explicitly temporary, expiring automatically after 10 years if not sooner. Businesses would be unable to plan for the future, decisions would be distorted in an effort to game the interval, and investment and innovation would suffer.

For good measure, the plan also includes an enormous new loophole, which would encourage many high-earning individuals to set up as "pass-through corporations" and pay a far lower rate of tax on their incomes. Preventing that, which the administration says it will, would require new rules. In this and other ways, the plan promises more complexity, not less.

Trump's basic idea isn't wrong: Broaden the base, simplify taxes and cut rates. But then those parts have to be arranged, and presented to the public, in a way that commands consensus. Trump has made no effort as yet to frame a plan that might appeal to moderate Democrats as well as most Republicans. That's a fatal flaw.

Maybe a plan of this sort can emerge from the wrangling still to come. But as it stands, Trump's proposal is not much help.

--Editors: Clive Crook, Michael Newman.

To contact the senior editor responsible for Bloomberg View's editorials: David Shipley at davidshipley@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.