Fraser Forum

The Trump and Bush tax reform plans would change business-as-usual

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The presidential nomination campaigns are in full swing in the United States. While most Republican and Democratic candidates have not released detailed policy statements on relevant domestic and foreign affairs issues, two Republicans, Jeb Bush and Donald Trump, recently revealed fairly detailed plans to reform the complex and messy U.S. federal tax code.

The main features of both the Bush plan and Trump plan encompass substantial cuts in personal and corporate income tax rates, reductions in the number of tax brackets and the elimination of specific exemptions and deductions.

Specifically, Bush is calling for cutting the number of individual tax brackets from the current seven to three, with the highest tax rate being reduced from the current 39.6 per cent to 28 per cent. This change would restore the top personal tax rate to the level signed into law by President Reagan in 1986.

Bush is also proposing to eliminate the current practice of taxing worldwide U.S. business income, as well as to reduce the corporate tax rate from 35 per cent to 20 per cent. Most corporate tax deductions, including deductions for costs of borrowing money, would be eliminated; however, businesses could fully and immediately deduct costs of new capital investments. On the personal income tax side, deductions for state and local income and property taxes would be eliminated.

Trump’s tax proposals are similar in some features to those of Bush. Trump’s plan would exempt single workers earning less than US$25,000 annually and married couples with joint incomes up to US$50,000 annually from any federal taxation. The seven current tax brackets would be reduced to four with a top tax rate of 25 per cent. Trump would cut the corporate income tax rate to 15 per cent, although he would not allow 100 per cent expensing of capital investments. He would eliminate business tax expenditures including deductions for interest paid, as well as remove certain deductions and exemptions on the personal income tax side. Similar to Bush’s proposal, Trump’s tax plan would eliminate the Estate Tax, as well as the Alternative Minimum Tax.

While tax reform proposals have been put forward over the past two decades, even proposals backed by both Republican and Democratic lawmakers have gone nowhere. The most noteworthy bilateral proposal that has failed to gain any real political traction is the Simpson-Bowles plan. Vested interest groups have been successful in lobbying for the protection of their favoured tax exemptions and deductions.

Furthermore, concerns about creating even larger government deficits have been used as a rationale by Democrat lawmakers and President Obama to resist proposals calling for lower tax rates, an essential feature of “supply-side” tax reform.

While it is still early days in the U.S. presidential race, it may well be that tax reform will gain momentum as an issue in the campaign. The slow pace of real economic growth post-2008 has arguably made

American voters more sensitive to bold plans for stimulating a return to the faster income growth eras of the 1980s and 1990s, especially on the part of middle-income families.
If Republican candidates can effectively communicate the supply side story for pro-growth tax reform, it might gain them strong support from an electorate increasingly dissatisfied with political business-as-usual.

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