As I noted yesterday, the New York Times is on its high horse about President Trump’s “tax cuts for the rich.”
And, to be sure, there are some. Lowering the top rate to 35 percent from 39.6 obviously benefits the more well-off as that rate kicks in only on incomes (for single tax filers) over $418,000. So does eliminating the 3.8 percent tax on the investment incomes of high earners, which is supposed to help fund Obamacare.
Eliminating the estate tax would also benefit the rich. Estates of less than $11 million (for a couple) are exempt from the tax, and the estates of only about 5,300 very rich people incur the tax in a given year. The Times says this would cost the federal government about $178 billion in tax revenue over the next decade.
But eliminating the estate tax, in fact, would be more a delay on taxation than an elimination of it. The estate tax is a capital gains tax that is triggered by death rather than by sale. Often, it forces the sale of assets regardless of whether the heirs want to sell or if the time is propitious to sell. Once the estate tax is paid, the cost basis of the remaining assets rises to the price on the date of death.
When the estate tax was eliminated for the year 2010, while the heirs of large estates that year paid no estate tax, the cost basis of the inherited assets remained what they had been before the death of the testator. So when those assets are eventually sold, as a large capital gains tax is often owed, making up for the lost estate tax revenue. For instance, Amazon stock is currently selling at about $950 a share. I don’t know what Jeff Bezos’s cost basis is on his vast holdings of Amazon, but my guess is that it is no more than a few cents a share.
Trump would also eliminate the alternative minimum tax that affects only the rich and upper middle class. Originally designed in the late 1960’s to tax wealthy Americans who had put their assets in such investments as tax-exempt bonds, it soon metastasized into a monster. The high inflation of the 1970’s forced many middle-class people to, in effect, calculate their taxes twice and pay the higher amount. Eliminating it is simply good tax policy. If it lowers the taxes on some of rich, so be it.
Lowering the capital gains tax to 15 percent would, of course, benefit the rich (as well as many middle-class citizens), but it would also increase federal revenues. A capital gains tax is incurred only when an asset is sold. With higher capital gains taxes people become increasingly unwilling to sell assets, so it impedes capital flows to better investments. Whenever the tax has been lowered, increased sales of investments have generated higher federal revenue despite the lower rates.
Only a liberal could be against lowering a tax rate when the effect of doing so would be to increase tax revenue.
And the Trump tax proposal also socks it to the rich. Only the top one-third of taxpayers ordinarily itemize deductions. And the proposal would eliminate all deductions except those for mortgage payments and charitable contributions. Many of the very rich live in high-tax states such as New York and California where, under current law, they can deduct from their federal taxes what they pay in state and local taxes. (This would also, of course, put great pressure on these states to lower their taxes and increase the exodus of the rich to low-tax states such as Texas and Florida.)
It might be pointed out that in high-tax states, the federal government, in effect, reduces the rate of state and local taxation on the rich by 39.6 percent and on their less affluent neighbors by only 25 percent. One would think the left would want to eliminate that perverse tax policy. But don’t hold your breath. High-tax states are blue states.
The Trump tax proposals for personal taxes would simplify the tax code, remove perverse incentives now built into it, free up capital markets, increase capital gains revenues, and stimulate the economy. But, of course, it would reduce the amount of taxes some rich people would have to pay and, therefore, to the brain-dead, it’s a terrible idea no matter how much economic good it does for the whole country.
I’ll cover the proposed changes in the corporate tax rates in a later post, but suffice it to say that they would supercharge the American economy, offsetting much of the revenue lost through lower rates.