Should We Take Donald Trump's Tax Cut Proposal Seriously?

By Robert Wenzel

Last week, Treasury Secretary Steve Mnuchin and  Director of the National Economic Council Gary Cohn marched in front of the cameras to announce a new proposed Trump tax reform plan.

To be sure, there will be changes to the plan as it is deliberated in Congress, Trump himself has admitted this.

But fundamentally at its core, is there anything in the plan to cheer about?
Some EPJ readers seem to think so.

At various posts where I have discussed the plan, comments such as these have been left:

 Imagine we had 3 tax brackets and the lowest rate of corp tax in the world. Then Trump proposed to increase rates, lower thresholds, add deductions for high earners, make the corp tax 40% and introduce an AMT. Can you imagine this blog's howls of outrage?
Libertarian For Trump Were Right All Along (LfTWRAA)!
---
I'm in favor of less taxes no matter what. Cutting spending would be an even bigger positive but again, that is a "fantasy". They won't cut military or SS/Medicare. The best we can hope for is tax cuts, so why is RW complaining so much about the tax cuts?
---
So all we can hope for is tax cuts, which are better than not doing anything. 

The point is that Trump's plan squeezes money out of the economy one way or another, Either through scam tax cuts or an increase in deficit spending. This is not good. The entire package must be looked at not just the lowered tax bracket.

This is no different than commenting on a seriously obese woman's diet. If I see her eating a salad, I suspect that this is not the entirety of her diet. Something like twinkies, bread, and cupcakes are likely filling up her diet during other parts of her day.

If a diet analysis is done based only on the salad she is eating at lunch, I could proclaim the woman has a great diet. That diagnosis would, of course, be absurd.

It is the same thing with the Trump tax cut. What must be understood is that if government spending isn't cut then from a full picture perspective, Trump is getting the money from our hide in some other fashion if the nominal tax brackets are lowered.

Indeed, even at this early stage in the proposal, the tax cuts to the middle class with kids look like a total scam.

Al Hunt explains at Bloomberg:

The White House trumpets its proposal to almost double the standard deduction, from a maximum of $12,600 to $24,000. This would benefit many middle-income taxpayers and simplify the code by encouraging more people not to take itemized deductions.

But some of these families actually would face higher taxes if, as with earlier Trump and Republican plans, it also eliminates the personal exemption, currently $4,050 per person. It’s difficult to be precise since the plan lacks specifics on tax brackets where various rates would kick in.

Think of a middle-class couple with three kids. With the personal exemption gone, they’d have to add $20,250 to their taxable income. That’s nearly double the new “benefit” they’d get from the increase in their standard deduction of $11,400.

These are the types of scams that will have to be run if  there are no cuts in government expenditures.

The only other option, and there will be some of this, is an increase in deficit spending.

This is a much slicker scam becasue it is less visible to taxpayers. If the government deficit goes up that means that private sector borrowing will be crowded out. This means somewhere in the economy businesses won't have the funds to expand. It might mean less housing being built, less consumer goods, whatever. But it will mean higher prices for goods because  productivity will be shrunk by the amount that would be produced by funds being directed toward the capital needed for the production.

It is possible that the Fed could step in and pump more money into the system to absorb the deficit spending but this would only result in accelerating price inflation that would be most damaging to those on fixed incomes.

So unless we have cuts in government spending along with tax cuts, it is just a shell game. The money will be squeezed out of us one way or another, Looking at just a cut in a nominal tax bracket doesn't tell us the entire picture. If you believe so, you are being scammed by one of the greatest street hustling city slickers to ever work his way into the Oval Office.

Tax cuts aren't real tax cuts if they are balanced by hidden tax increases and deficits that suffocate the economy. Unless government spending goes down, the amount of funds taken out of our hides is the same with even greater distortions to the entire economy.

Robert Wenzel is Editor & Publisher of  EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics, on LinkedIn and Facebook. The Robert Wenzel podcast is on  iphone and stitcher.