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Steven Mnuchin, Gary Cohn, tax reform Copyright Mark Wilson, Getty Images

The Trump Tax Proposal's Devilish Details

It's not aging well.

By Albert R. Hunt

(Bloomberg View) --The Trump tax plan, unveiled in one sketchy page last week, is like a bottle of bad wine: It's not aging well.

Central questions remain unanswered. The White House says it will fill in the important details later, in the meantime pushing dubious and duplicitous claims.

Three illustrations make the point. Administration officials won't say whether the personal exemption would be eliminated, hardly an arcane detail. They falsely suggest that the plan will increase taxes on some wealthy investors by eliminating a tax loophole used by executives of hedge funds and private-equity firms known as “carried interest.” And they rely on the dubious assumption that Congress will no longer allow state and local taxes to be deducted from federal taxes. 

As more phony claims and higher costs emerge, the already tough task of reforming the tax system becomes even more difficult. President Donald Trump’s proposal favors more affluent taxpayers and would add considerably to the federal deficit.

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.

The personal exemption costs the government somewhere between $1.6 trillion and $1.9 trillion over 10 years, based on estimates of previous Trump and congressional Republican tax plans. That's money that could offset other cuts if eliminated, or contribute to higher deficits if left in place.

Trump advisers insist that big cuts in tax rates would pay for themselves by generating strong economic growth, a highly speculative claim, to put it gently. They also claim they’d add revenue by eliminating most tax deductions, though not the politically popular write-offs for charitable contributions and home mortgage interest. But the plan doesn’t specify which deductions would go, citing only the ones for state and local taxes paid.

Don’t hold your breath. There are 35 Republican congressmen from the high-tax states of California, New York, New Jersey and Illinois, and some of them are already balking. With a 22-vote margin in the House of Representatives and with no Democratic support, Republican leaders will be dealing with some brutal arithmetic when it comes to eliminating state and local tax deductions. 

Buy some more red ink.

The idea of ending the carried-interest loophole was pushed hard by Trump during the 2016 presidential campaign as he sought to establish his populist credentials. His advisers have run with that theme since last week, claiming they're ready to end that special tax break, which lets hedge-fund and private-equity executives pay lower capital-gains rates instead of the regular rates on ordinary income.

But the Trump proposal would reduce the top corporate rate to 15 percent from 35 percent, meaning it would be lower than the maximum capital-gains rate. Since many hedge funds and private-equity firms are partnerships, their executives would qualify for the corporate rate under the administration plan. So ultimately their taxes on carried interest would be cut, not increased.

So much for populism.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Albert R. Hunt is a Bloomberg View columnist. He was the executive editor of Bloomberg News, before which he was a reporter, bureau chief and executive Washington editor at the Wall Street Journal.

To contact the author of this story: Albert R. Hunt at [email protected] To contact the editor responsible for this story: Jonathan Landman at [email protected]
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