So now Donald Trump’s gone and done something serious. Bummer.
But actually, don’t sweat it, because if you look a little more closely and the tax plan he unveiled Monday, you’ll see it isn’t very serious at all: one more piece of evidence that to Republicans, when it comes to tax cuts, deficits truly don’t matter. He’d reduce the top marginal rate to 25 percent on dollars earned above $300,000 (for a married filer); it’s now 39.6 percent on dollars earned above $450,000. And he’d dramatically increase the number of people who pay no tax at all (but I thought Republicans were angry at these people and wanted them to pay more!).
The nonpartisan tax experts haven’t run the numbers yet, but they will soon, assuming there’s even enough detail in the proposal for them to try, and I expect that when they do, we’ll see what we always see with GOP tax proposals—it won’t add up, because they never do. And when confronted with these numbers, Trump, like Mitt Romney and George W. Bush and a parade of Republican candidates before him, will say these geeky little experts don’t know what they’re talking about because he’ll unleash the growth that’s been suffocated for the last eight years and the federal coffers won’t even be able to hold all the revenue that will roll in and life will be a dream.
Yada yada yada. But there is something interesting about Trump’s proposal: He wants to eliminate the carried interest provision that gives the hedge-fund guys a much lower tax rate than the rest of us. Right now, they often earn many millions every year and supposedly pay a rate of around 24 percent.
Jeb Bush is for doing this too. So that’s two major GOP candidates (we still calling Bush major?) who are for a tax increase. And not just any old tax increase. One that would soak the rich! Isn’t this awesome?
Actually, no. Well, wait. Yeah, I mean, ever since Warren Buffet put it so starkly a few years ago by saying how ridiculous it is that he pays a lower tax rate than his secretary, sure, fixing this has been a matter of basic decency. The loophole is an absurd scam. It would be great to close it on principle.
But the problem is that it would make almost no difference to the United States Treasury. According to the Tax Foundation, closing the loophole for hedge-fund managers and private-equity partners, the two groups who take advantage of it now, would bring in a paltry $1.3 billion a year in revenue. By comparison, the estate tax that Trump and Bush both promise to eliminate brings in around $24 billion a year.
And in fact, Trump’s loophole fix wouldn’t bring in even $1.3 billion, because there’s a key difference between his proposal and Bush’s. As noted above, the lower rate is paid by two groups, hedge-fund managers and private-equity partners. Trump would have the new, higher rate apply only to hedge-funders, not PE people. Bush’s would make people in both categories pony up. Trump hasn’t explained why, but I imagine he would say that PE people are making longer-term investments that at least (hopefully) contribute to the economy, while hedge-funders just traffic in short-term profit maximization. They’re the people he means when he says things like these guys just push paper around.
So with Trump’s plan at least, we’re talking about a few hundred million dollars a year into the Treasury. Meanwhile, he cuts the top rate from 40 to 25 percent. Bush would cut the top rate to 28 percent. Both would also reduce the top capital gains tax rate by a few points, would completely eliminate the inheritance tax, and would do away with something called the Alternative Minimum Tax, which limits the extent to which high-income earners can reduce their tax bills through deductions and exemptions. There’s a lot more along these lines. In fact, Josh Barro of The New York Times wrote that Trump’s proposal would still cut the tax bills of many hedge-funders because it would not subject all their income to the 39.6 percent rate.
OK, let’s get out of the weeds now. The point is this. Because the carried-interest loophole gets a lot of press, and because nobody likes hedge-fund guys to begin with, lots of even pretty well-informed people think that closing this loophole constitutes the wielding of a mighty sword of economic justice. It is that in principle, but in practice it’s nothing. Comparative pennies in the grand scheme of things. So Republicans like Trump and Bush can go around saying “Hey, look at me, I wanna tax the rich guys!”, and the media will buy it, while in fact they’re doing the opposite.
This is why Grover Norquist of Americans for Tax Reform, the leading conservative cop on the tax-increase beat, is just fine with all this. He gets the perception. “Doing carried-interest [repeal] permits rate reduction,” Norquist told me Monday. “So I’d say that’s a fine change.”
Democrats are partly to blame for how poorly all this is understood. Barack Obama and Hillary Clinton and Bernie Sanders and (almost) all of them thunder about the Buffett Rule and the nasty hedge-funders because they’re an easy mark. But they don’t do a very good job of going on to explain that eliminating the loophole doesn’t amount to much. Well, I say it’s time to start explaining.