Trump Tax Plan: Pros and Cons

Nelson Hultberg

October 3, 2015

Donald Trump has shaken up today’s craven political establishment like Tom Paine shook up the Tories of colonial America. He has irreverently proposed genuine solutions to the invasion of “illegals.” He has attacked the poltroons of Washington and the talking heads of the media. He speaks rudely and boldly. The question now is, has he also been daring enough to put forth a bold tax reform plan?

The answer is yes and no. Trump’s tax plan has numerous great features, but it also has one very bad feature. Let’s examine the good points first, and then tackle the bad aspect of the plan.

The Good Features

Most importantly, the plan lowers the top individual rate to 25% from the present 39.5%. It then establishes three additional rate brackets of 20%, 10%, and 0%, and it simplifies the overall implementation of taxation by purging numerous arbitrary deductions and exemptions. It also lowers corporate / business taxes to 15% from the punitive 35% presently endured, while eliminating the so called “death tax” and the Alternative Minimum Tax.

In addition the Trump plan hopes to bring back approximately $2.5 trillion in cash that American companies have parked in foreign countries. It will be taxed at a one-time rate of 10% upon repatriation, and then any profits it generates stateside in the future will be assessed the new corporate rate of 15%.

These are all welcome features, indeed. We are a nation of “enterprisers.” Our tax rates should be minimal, not confiscatory. The Trump plan will end much of the overreach of Washington and its obtuse politicians. Tens of thousands of new ventures will spring up. Jobs will be created. Productivity will increase. Families will breathe easier. Bills will be less burdensome. Life will be more rewarding.

The Bad Feature

But there is a major flaw in the mindset of Trump tax theoreticians. It is their insistence on increasing the number of individuals who pay zero taxes. The Trump plan states that it will eliminate the income tax for over 73 million households. Why is this a bad feature? The reason lies in what economists call “infinite demand.”

Most Americans don’t understand it, but the major cause of explosive government spending is our use of “progressive tax rates” to redistribute wealth. This is because the progressive income tax permits large constituencies of voters to pay zero taxes.

The Joint Committee on Taxation in Washington, D.C. reported on April 29, 2011 that 51% of American households pay no federal taxes. The IRS confirms this figure. It has been in effect actually for decades.

Why is this bad? Because of that tricky devil, “demand.” When large groups of voters are allowed to pay nothing in taxes, an irresponsible electorate evolves to demand a steady expansion of government services. This is basic human nature and one of the cardinal laws of economics. If government benefits are free, demand for them will be infinite! Consequently, in every election there is now an automatic 50% base of voters who always favor those politicians who propose increased government spending.

Overcoming this “infinite demand” for government spending will be impossible until we eliminate from our tax system its “something for nothing” aspect, i.e., its huge number of zero-payers. This means ending all deductions, special breaks, loopholes, and rate progressivity. This will necessitate the adoption of a simple equal-rate tax (i.e., a genuine flat tax) that does not convey favors or exemptions to anybody above the standard poverty level.

Since voters would then have to pay for all government subsidies and pork barrel programs proportionately out of their own pockets, they would lose their overwhelming desire for such subsidies and programs. They would begin to favor politicians who advocate “reduction” of government instead of its “constant expansion” because this is the only way they could get their own taxes reduced and more freedom into their lives.

The voters would start sending Ron Pauls to Congress instead of Chuck Schumers. Wouldn’t that be wonderful. But as long as voters pay zero taxes, they will continue to favor politicians who offer more programs and more pork every November at election time. An “equal-rate tax” assessed to all earned income above the poverty level ($24,250 for a family of four) is the only way to get control of “infinite demand” and end the automatic expansion of government.

Trump Plan and “Infinite Demand”

This means lessening the number of zero-payers rather than increasing it as Trump wishes to do. Under the Trump plan, all individuals who earn $25,000 or less will pay zero taxes, and all married filers who earn $50,000 or less will pay zero taxes. This will greatly increase the present 51% of American households who pay no taxes. As much as 60% will now pay zero taxes, which will increase “infinite demand” for government services explosively. This will be a disaster! Government will now grow even faster.

This is the opposite direction that we need to go. We should be bringing more citizens into the system. We should be lowering that 51% figure of “zero-payers,” rather than increasing it. We need to get it down to below 30%, not raise it to 60%.

In other words, as many citizens as possible must contribute to the system rather than mooching from the system. Under a 15% flat tax, everyone (no matter how small their contribution) has a stake in being a responsible citizen and voting for the common good instead of trying to get something for nothing by taking money from his neighbor.

Such a flat tax would quickly bring about a reduction of government, and as a result the 15% rate could be lowered accordingly. We could probably have a flat tax of 7-8% within a couple of decades because very few people would continue to vote for all the pork and privileges if they had to pay for them out of their own pockets. We could then eliminate the flat income tax and replace it with a 7-8% sales tax. This level of a sales tax would be salable to the American people, while the present Fair Tax of 23% is not salable.

How to Pass a True Flat Tax

We at AFR believe that a true flat tax of 15% cannot win acceptance unless it is sold as the only moral form of taxation in a country based upon “equal rights under the law.” A politician must pitch it from this perspective: equal rights means equal rates. Any other form of taxation is unconstitutional and tyrannical. And he must pitch it with moral zeal. He must attack the media as violating the cardinal principle that undergirds our country when they attack him as favoring the rich. It will take a politician who can think outside the box and has the courage to go against the herd mentalities of the establishment. Nothing else can stop the relentless growth of government and save the country.

This means challenging the liberal principle of social egalitarianism, which idealizes “equal results” instead of “equal rights.” A successful politician must start here. We are not a country that promotes “equal results” in life. We are a country that promotes “equal rights” under the law. Whatever kind of society comes from equal rights under the law is justice. This is what America is supposed to be about.

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