Comparing the Trump Campaign and Better Way Tax Plans
With President Trump expected to release new details about his Administration's tax reform plan on Wednesday, we thought it would be useful to take another look at two existing tax plans that may inspire his recommendations: the House GOP "Better Way" tax plan (see our analysis here) and President Trump's previous tax plan from the 2016 presidential campaign.
The two plans have many similarities but also several key differences. Overall, President Trump's campaign plan includes deeper tax cuts and fewer offsets. The Tax Policy Center (TPC) scored both plans last year, and they have since updated some of their estimates of the Better Way plan. Based on the details available, they find the tax reform portion of the Better Way plan would cost about $2.3 trillion over 10 years before accounting for economic growth while the Trump plan would cost around $6 trillion. The Tax Foundation has produced estimates with similar conclusions.
Revenue Impact of the Better Way and Trump Campaign Tax Plans (Billions)
|Repeal the Alternative Minimum Tax||-$425||-$400|
|Reduce Income Tax Rates to 12, 25, and 33 Percent||-$1,550||-$1,500|
|Limit Itemized Deductions||$1,900||$550|
|Modify Personal Exemptions, the Standard Deduction, and Household Filing Status||$300||$450|
|Lower Capital Income Tax Rates||-$500||$0|
|Repeal the Estate Tax||-$175||-$175|
|Other Individual Income Tax Changes||$100||-$125|
|Individual and Estate Tax Changes||-$350||-$1,200|
|Reduce Corporate Tax Rate and Repeal the Corporate AMT||-$1,850||-$2,350|
|Lower Tax Rates on Pass-Through Business Income||-$425||-$1,550|
|Allow Full Expensing and Disallow Interest Deduction on New Loans||-$1,075||-$1,275|
|Apply a Border Adjustment to Business Taxes||$1,175||$0|
|Other International Tax Reforms||$50||$150|
|Repeal Various Business Tax Expenditures||$175||$225|
|Business Tax Changes||-$1,950||-$4,800|
|Total Tax Reform Cost (Conventional)||-$2,300||-$6,000|
|Additional Possible Adjustments||$800||$650|
|Tax Reform Cost with Additional Adjustments and Dynamic Feedback (assuming no interaction)||-$1,450||-$5,150|
Source: Tax Policy Center, CRFB calculations.
Dynamic feedback estimated based on TPC estimates of short- and long-run macroeconomic effects.
"Additional Possible Adjustments" includes eliminating special-interest tax breaks for Better Way and preventing gaming of the lower pass-through tax rate for Trump.
Numbers may not sum due to rounding.
While the two plans share some common features, there are several key differences that contribute to the large difference in cost.
In terms of similarities, both plans consolidate and reduce individual rates to 12%, 25%, and 33%, significantly lower business tax rates, repeal a number of tax expenditures, eliminate the Alternative Minimum Tax (AMT), consolidate family-related features of the tax code, and move toward full expensing of business investment.
On the individual side, the Trump plan is about $850 billion more costly. The difference is more than entirely attributable to the fact that the Better Way blueprint eliminates all itemized deductions outside of charitable giving and mortgage interest, while the Trump plan only caps itemized deductions above $100,000 per person. Partially offsetting this, the Better Way blueprint reduces capital gains and dividends tax rates while the Trump plan retains current rates.
On the business side, the Trump plan is roughly $2.8 trillion costlier than the Better Way plan. Much of this is driven by the fact that President Trump had proposed reducing the corporate rate and pass-through entity rate to 15 percent, while the Better Way plan proposes rates of 20 and 25 percent, respectively. The Better Way plan also proposes to offset a large share of its corporate rate cut with a "border adjustment" that exempts exports from taxation while ending the deductibility of import costs. Since the U.S. is currently running a trade deficit, this raises a significant amount of revenue.
Of note but without significant fiscal relevance, the Better Way plan proposes full expensing and the end of interest deductibility for all businesses, while the Trump plan offers businesses an option to take this approach or continue as under current law.
Importantly, neither the Better Way Blueprint nor the Trump campaign tax plan spelled out every detail, and several "adjustments" implied by their plans could alter TPC's score. If the Better Way plan eliminated several "special interest tax breaks," the plan's cost could drop by $800 billion. Meanwhile, effective anti-abuse measures that prevent gaming the lower rate on pass-through income could reduce the cost of the Trump plan by about $650 billion. Both plans could also generate dynamic revenue that further reduces their cost. Based on TPC's revised score of the Better Way plan, we estimate it would generate about $50 billion in dynamic revenue feedback over 10 years. The Trump plan would generate nearly $200 billion in dynamic revenue, largely because TPC assumes the plan's much larger tax cuts would have a larger short-term Keynesian response. In both cases, the higher debt from the tax plans would result in them eventually harming economic growth.
Even with these adjustments, however, details put forward thus far suggest both plans would fall short of the revenue goals Congressional leaders have laid out. Speaker Paul Ryan (R-WI) and Ways and Means Committee Chairman Kevin Brady (R-TX) have set a target for revenue neutrality against a "current policy" baseline that assumes $450 billion in lower revenue over 10 years on a dynamic basis. As for President Trump's revenue target, we hope to learn more on Wednesday.
There are many reasons to want to reform that tax code, but tax reform should not come at the cost of worsening our already unsustainable fiscal situation. When the President releases the first details of his new tax plan this week, we hope he will take a page from our 5 Reasons to Pay for Tax Reform paper and commit to making his proposal fiscally responsible.