Anne L. Alstott ’87 JD is the Jacquin D. Bierman Professor in Taxation at the Law School. Alstott recently offered the Yale Alumni Magazine her analysis about how the Trump administration will shape tax law during the next four years. Read the full piece featuring faculty around the University here.
With Republicans controlling both the White House and the Congress, the stage is set for massive tax cuts for businesses and the wealthy. Both President Trump and Speaker of the House Paul Ryan have released plans that would slash taxes. The two approaches differ in the details but share three commitments.
First, both plans would lower marginal tax rates (that is, tax brackets), with the top rate falling from the current 39.6 percent to 33 percent. Both would also repeal the 3.8 percent tax on net investment income, which applies to interest, dividends, and other capital income earned by taxpayers with substantial incomes.
Second, both would enact unprecedented cuts in business taxes, setting tax rates on business income below the rates on individual income (15 percent in Trump’s plan and 20 to 25 percent in the House GOP plan).
Both proposals endorse immediate expensing of business investment—a change that sounds like a technical fix but signals a major policy shift toward converting the US income tax into a consumption tax. Today, businesses can’t deduct what they spend on plant, equipment, and other durable goods. Instead, they depreciate these investments over time, which is the right way to measure income in an income tax.
By contrast, a consumption tax seeks to tax only funds spent on personal consumption (like food and rent). Investment in plants and equipment isn’t personal consumption and so should be deducted from the tax base. In practice, governments use different mechanisms to tax consumption: most of us have paid retail sales taxes. But whatever the form, all consumption taxes use some mechanism to avoid taxing business investment.
Third, both proposals would repeal the estate and gift taxes. These taxes, which now target gifts and bequests made by the richest 1 percent of Americans, have long been a target for conservatives opposed to the “death tax.”
We have no official government numbers quantifying the effects of either the Trump plan or the House GOP plan. But the Tax Policy Center, a respected arm of the Brookings Institution and the Urban Institute, estimates that the Trump plan would lose $6 trillion in revenue over ten years, with business tax cuts accounting for three-quarters of that cost. The Tax Policy Center estimates that the House GOP plan would lose $3 trillion over the same period and award 75 percent of benefits to the top 1 percent of households.
We can expect Trump and the GOP to contest numbers like these on the grounds that tax cuts will spur economic growth and fill government coffers. The conservative Tax Foundation, for instance, predicts that economic growth will reduce the Trump plan’s ten-year cost from about $4.4 trillion to about $2.6 trillion. By contrast, the centrist Tax Policy Center finds that macroeconomic effects would reduce the cost of the Trump plan only slightly. Anticipate a heated debate over this so-called “dynamic scoring,” which is sensitive to assumptions and models used.