No one expects the debates between Trump and Clinton to include anything more than name calling. So I’ve decided to provide a serious, if perhaps one-sided debate between my two opponents and myself.
Today’s debate is on taxes.
Here’s what I take to be the essence of Trump’s and Clinton’s tax plans.
Trump: Reduce federal income tax brackets from seven to these three ― 12 percent, 25 percent, and 33 percent, raise the standard deduction, raise the child tax credit, eliminate the Alternative Minimum Tax, raise the Earned Income Tax Credit, eliminate the estate and gift tax, and set a 15 percent tax rate on corporate and non-corporate business income. (This last provision will induce everyone in a higher-than-15 percent income-tax bracket to start their own companies so as to receive their income as business owners and have it taxed at 15 percent.)
Clinton: Add a 4 percent surcharge on incomes over $5 million, tax adjusted gross income (AGI) over $1 million at a minimum of 30 percent, limit the tax value of itemized deductions to 28 percent of taxes, limit contributions by the rich to retirement accounts, raise capital gains tax rates, tax carried interest as ordinary income, provide tax credits for caregivers of elderly parents, raise estate taxation, limit corporate tax loopholes, and tax high frequency trading.
My quick take? Trump and Clinton’s tax plans were conceived in a vacuum. They don’t result from an overall assessment of America’s long-term fiscal condition, its work disincentives, its investment disincentives, or its fiscal fairness. Consequently, Trump and Clinton’s tax plans involve a grab bag of piecemeal “reforms” when fundamental tax reform is needed.
What’s my tax reform? It’s coming, but first let me provide my take on our general fiscal position.
First, our country is dead broke. When you put everything on the books, the present value of all projected spending (including entitlement obligations) exceeds the present value of projected taxes by $199 trillion.
This measure of true government indebtedness, which economists call the fiscal gap, is based on Congressional Budget Office projections. It swamps official debt by a factor of 10. Neither Trump nor Clinton has said boo about our nation’s fiscal gab. They keep focusing on official debt. Yet over 1,300 American economists, including 17 Nobel Laureates, strongly endorse replacing deficit accounting with fiscal gap accounting at www.theinformact.org.
Given the magnitude of our fiscal gap, we need to collect far more taxes and spend far less through time. And we can’t rely on economic black magic. We can’t pretend that either tax cuts or spending hikes will more than pay for themselves as my opponents are wont to do.
Clinton and Trump don’t get that we are broke and that we aren’t broke in 30 years or in 20 years or in 10 years. We are broke today. Consequently, their policies will let the fiscal gap grow, worsening the terrible fiscal problem our country, but primary our children face.
My reforms, not just of taxes, but also of healthcare (discussed in a future debate), and Social Security (also discussed in a future debate), eliminate the U.S. fiscal gap and put an end to our politicians’ six decades of fiscal child abuse.
Second, our fiscal system is placing tens of millions of Americans in high to very high to prohibitively high tax brackets giving them little or no incentive to work. This is particularly the case for poor families.
To understand work disincentives, you need to consider all of our roughly 30 tax systems, not just focus, as do Trump and Clinton, on income-tax brackets.
Woah, 30 tax systems?
Yes. Take the Medicare Part B premium tax. The higher your income, the higher your premiums. So, yes, it’s a tax. The federal income tax has 7 brackets. The Medicare Part B premium has 5. Or take Food Stamps. If you earn nothing, no problem. But start making money and every dollar you earn can cost you more than 20 cents in Food Stamps. Medicaid? It’s worse. Earn a penny too much and, bingo, lose all your benefits and those of your kids and spouse. Obamacare? It taxes participants roughly 25 cent on each dollar earned via reduced subsidies and higher premiums. Welfare benefits, Social Security’s Earnings Test, the Earned Income Tax Credit, the Child Tax Credit, the phase out of deductions and exemptions, the new high-income Medicare asset-income and wage-tax taxes, the taxation of Social Security benefits, state income taxes, state sales taxes ― each plays a major role in reducing work incentives.
Want to see the incredibly high work disincentives far too many Americans, particularly poor Americans face after you combine all 30 tax systems? Then please look at this recent study I conducted with Berkeley economist Alan Auerbach.
If Donald Trump thinks that moving someone who is in a 75 percent marginal tax bracket to a 65 percent tax bracket will get that person to work, he has another think coming. But as with our fiscal insolvency, Trump isn’t seeing the total picture when it comes to work disincentives. Nor is Clinton.
My fiscal reforms, including my healthcare, Social Security, and Food Stamp reforms, put everyone, rich, middle class, and poor in the same 30 percent tax bracket when it comes to paying taxes on labor earnings. For the poor, this arguably represents the most important welfare reform one could possibly promote.
Third, under the current tax system as well as under both Trump’s or Clinton’s tax reforms, the super rich can avoid paying virally any income taxes whatsoever. The method is extremely easy and none of Clinton’s tax proposals, which supposedly go after the rich, would get the rich to pay a penny more.
Here’s how the super rich avoid paying taxes. They simply borrow to consume and never or rarely sell their assets. This way they never realize capital gains and never have to pay income taxes. When they die, they pass their appreciated assets to their heirs with a “step-up in basis” so their heirs also never pay capital gains taxes on the appreciation. Moreover, the super rich use an array of estate tax gimmicks to keep their heirs from paying the estate and gift tax. My reform stops this game. The superrich, like everyone else, will pay their fair share of taxes, year in and year out.
Either Clinton and Trump aren’t aware of this standard means by which the superrich avoid taxes or they are and are willing to keep giving the super rich a pass. I’m not.
Fourth, the corporate tax is hurting U.S. workers more than its hurting rich Americans.
The corporate tax, thanks to its loopholes, collects very little revenue. Its sole purpose appears to be keeping companies, foreign and domestic, from operating and employing workers in the U.S. Viewing corporations as rich people, as does Clinton, and taxing their presence in our country simply drives corporations away, which eliminates U.S. jobs. Trump’s reduction in the corporate tax rate makes sense, but, as indicated above, taxing all business income at 15 percent in the context of retaining the personal income tax would be disastrous.
My Tax Plan
As explained in my platform, I would radically reform healthcare, Social Security, and Food Stamps. These reforms would dramatically reduce work disincentives particularly those facing poor and older workers.
Here’s my tax reform, which is designed to collect significantly more revenue than the current system and, thereby, help eliminate the fiscal gap, put everyone in a 30 percent tax bracket when it comes to labor earnings (in conjunction with my other reforms), and ensure that we have a tax system that’s truly progressive, not one that gives the super rich a pass.
Please read the platform book for details, but here’s my tax plan in a nutshell.
1. Eliminate the ceiling on Social Security’s payroll tax.
2. Implement a 20 percent value added tax.
3. Implement a 20 percent inheritance tax on all gifts and bequests received over one’s lifetime after they exceed $5 million.
4. Implement a progressive personal consumption tax rate on annual consumption above $100,000. The tax rate would start at 5 percent and rise to 30 percent. Consumption would be calculated on a cashflow basis, specifically it would be calculated as a) all inflows, including all non-labor income, borrowing, proceeds from sale of assets, and imputed income from ownership of mansions, yachts, and airplanes less b) all outflows on investments and charitable contributions. This tax effectively taxes consumption by the rich that is financed from their wealth, not their labor earnings. The tax also hits consumption done abroad.
5. Implement a carbon tax, which would be set at $50 per metric ton of CO2 and kept constant through time to give dirty-energy producers a reason to delay their production and sale of dirty energy. This will produce the slow, rather than fast fossil fuel burn needed to help keep our climate from reaching a tipping point.
6. Provide an inflation-indexed $2,000 payment per year per American citizen.
7. Eliminate the personal income tax with appropriate transition rules that require, for example, the realization of deferred capital gains and the taxation of as yet untaxed retirement account balances.
8. Eliminate the corporate income tax with appropriate transition rules that require, for example, the repatriation and taxation of untaxed profits earned abroad.
9. Eliminate the estate and gift tax.
As a group, these reforms would raise more revenues, radically improve work incentives, dramatically incentivize corporate investment in the U.S., improve fiscal progressivity, and help prevent our own and our children’s biggest nightmare ― climate change.