23 Nov Trumpian Tax Reform

“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” – Will Rogers
“This time can be different.” – The Lonely Realist

President-elect Trump has a unique opportunity to magnify his historic election victory by reforming dramatically improving America’s tax system and, in doing so, simultaneously satisfy every one of his major campaign pledges. His Administration could accomplish this feat in a Reaganesque style that would raise America to new economic heights. Where Congress previously was an impediment to change, today’s Trumpian sweep could mean that this time indeed will be different.

The striking pledge made by Donald Trump on Election Night was to “govern by a simple moto: promises made, promises kept.” The most important promises made by Candidate Trump were to disrupt America’s “deep state” and renew the 2017 tax cuts that otherwise are scheduled to expire at the end of 2025. President-elect Trump’s tax pledges included the elimination of taxes on tips, overtime pay and Social Security benefits. Although doing so would be costly in today’s era of burgeoning Federal debt and deficits, the President-elect also promised to impose tariffs of 10% or more on products imported into America, which would somewhat offset the costs of his promised tax reductions. How can tax cutting, tariff-raising and deficit reduction be reconciled?

TLR last discussed taxes in January 2023 as part of an analysis of tax reforms proposed by Congressional Republicans in the Fair Tax Act of 2023 (FTA), which would have repealed the Internal Revenue Code (IRC) and abolished the Internal Revenue Service (IRS), replacing America’s income and estate taxes with a Value Added Tax (VAT) of 29.87%. The last time tax reform was seriously considered was 30 years ago when Congress debated replacing the IRC with a simplified flat tax that would have reduced tax preferences and taxed consumption (via a VAT). What actually happened was the opposite. The Taxpayer Relief Act of 1997 added new deductions and tax credits, made taxes more complicated, and raised tax rates. That’s been the Congressional modus operandi for decades. Changing the rules requires both strong leadership and one-Party control of the Presidency and Congress – the incoming Trump Administration has both, creating a once-in-a-generation opportunity. The IRC is an unworkable mess vestige of 20^th Century policy-making that is in desperate need of reform…, and now is the first time in decades that such reform not only is possible, but fully consistent with the policies and policy prescriptions articulated by the incoming Administration. Such tax reform consequently is achievable. Moreover, tax reform provides the ideal complement to the Tariff Man’s expressed intentions and his America First policies.

Tax efficiency needs to be at the heart of America’s tax system and it isn’t. Efficiency cannot be achieved without simplification that relieves Americans of the tax return burdens that cost more than $133 billion/year and consume 12 billion hours/year of compliance time. Nor can efficiency be achieved without a public belief that America’s tax system is fair…, which it isn’t. Moreover, if America is going to pay its debts – currently exceeding $36 trillion –, it will have to be more successful at collecting the taxes it is owed. It is estimated that Americans underreport their income by $1.33 trillion/year, in part because American taxpayers believe that the taxation system itself, as well as the audit and tax collection methods used by the IRS, are unreasonable. One of the more popular proposals in the FTA was the elimination of both income taxes and the IRS…, and the President-elect has made no secret of his desire to cut the Federal bureaucracy. A good starting point would be the IRS.

A tax system that would be consistent with Candidate Trump’s promises and meet America’s 21^st Century needs would rely on the same type of VAT tax proposed by the FTA (a tax that is commonplace throughout the world) which, happily, is the form of taxation favored by tax reform experts. It would be an ideal complement to President-elect Trump’s proposed universal tariffs and to his campaign pledges to eliminate the taxation of tips, overtime pay and Social Security benefits. The model for doing so has existed for decades in the Competitive Tax Plan (CTP), (which has been an oft–repeated TLR subject), which would shift the focus of America’s current tax system to a VAT/consumption tax collected at the source on specified purchases (and lends itself to being laddered with tariff increases), reduce taxes on savings and investments, and eliminate tax – and tax returns – for more than 85% of Americans. Eliminating taxes, record-keeping and compliance for Americans earning less than ~$200,000/year would be a major simplification that would benefit both individual Americans and American businesses, reducing costs and the enormous number of special interest tax provisions that riddle the IRC while also reducing the need for over-reaching income tax enforcement. The CTP indeed would make America great in tangible ways, more so even than Ronald Reagan’s 1986 tax reforms. That’s precisely the stern Churchillian stuff sought by the President-elect and by Elon Musk’s Department of Government Efficiency, precisely the type of America First disruption advocated by Candidate Trump, and precisely what a socially and economically successful democracy requires.

Finally (from a good friend)

Be sure to bring up politics at Thanksgiving dinner.
It’s going to save you money on Christmas gifts.