Facebook Twitter Tumblr Close Skip to main content
A Project of The Annenberg Public Policy Center

Is Trump’s Tax Plan Revenue Neutral?

Donald Trump claims his tax plan is “revenue neutral,” but tax experts say that just isn’t so. Not by a long stretch.

Even assuming the tax cuts would promote economic growth, the pro-business Tax Foundation estimates the Trump plan would reduce revenues to the Treasury by more than $10 trillion over 10 years.

Separately, Roberton Williams of the nonpartisan Tax Policy Center said it would require “substantial budget cuts” to make up for lost revenues.

The Trump tax plan, which he unveiled in a Sept. 28 press conference, includes deep tax cuts for individuals and businesses alike. And, he said, “all of this does not add to our debt or our deficit.” A position statement outlining the tax plan on Trump’s campaign website says the “tax cuts are fully paid for” by reducing or eliminating some individual and corporate tax preferences, and by repatriating corporate cash held overseas.

Trump is also banking on the plan spurring economic growth to generate new revenue. In a Sept. 28 piece penned for the Wall Street Journal, Trump again boasted, “With moderate growth, this plan will be revenue-neutral.”

Given the generous tax cuts proposed in the plan, however, Alan Cole, an economist with the Tax Foundation, said he was “puzzled” by Trump’s claim that the plan would be revenue neutral.

After performing an analysis of Trump’s proposal, Cole wrote in a blog post, “I do not believe this to be true under any scenario remotely resembling Mr. Trump’s plan.” The post ran under the unequivocal headline, “Donald Trump’s Tax Plan Will Not Be Revenue-Neutral Under Any Circumstances.”

The Tax Foundation estimates Trump’s plan would cut taxes by nearly $12 trillion over a decade on a so-called “static” basis, meaning not taking into consideration how tax cuts could spur economic growth and increase revenues. The Tax Foundation believes the plan would increase incentives to work and invest, thereby spurring the economy. But even assuming that added revenue bump, called “dynamic scoring,” the Trump plan is expected to reduce tax revenues by just over $10 trillion over a decade, the Tax Foundation estimates.

And that’s because the tax cuts proposed by Trump are so deep, Cole does not believe any of the offsetting revenue streams — like reducing or eliminating personal and corporate tax expenditures — would be nearly enough to offset the revenue lost by those cuts.

The Proposed Cuts

On the individual side, Trump’s plan would consolidate the current seven tax brackets into four. One of the biggest revenue reducers would come from Trump’s proposal to reduce the top individual income tax rate from 39.6 percent to 25 percent. Trump would also expand the number of Americans who pay no taxes.

Under the Trump plan, single filers making $25,000 or less, or married couples making $50,000 or less, would pay zero income tax (or as Trump put it, they would fill out a one-page letter to the IRS that says “I win”). Trump says that would remove nearly 75 million households – over 50 percent – from the income tax rolls. But many of them are already not paying federal income taxes.

According to a Tax Policy Center analysis, about 67.3 million tax filers (41.4 percent of all tax filers) paid no federal income tax in 2014. Eric Toder, co-director of the Tax Policy Center, said it’s difficult to know how many more might be removed from federal tax obligations under Trump’s plan until he provides further details about how the plan would be structured.

While the Tax Foundation analysis found that the tax cuts would lead to lower taxes for taxpayers at all levels of income, the biggest winners — in raw dollars and on a percentage basis — would be those in the top 10 percent of filers, particularly those in the top 1 percent. Still, Cole wrote in a blog post on Sept. 30 that the plan “also contains a very large middle-class tax cut.”

According to the Tax Foundation analysis, after-tax income would increase by 3 percent for those in the 30 percent to 40 percent decile, and 8.9 percent in the 80 percent to 90 percent decile (on a static basis). Those in the top decile would see an increase in after-tax income of 14.6 percent.

On the corporate side, Trump would cut the corporate income tax rate from 35 percent to 15 percent. Similarly, pass-through businesses — independent contractors, small LLCs etc., which are currently taxed as ordinary income up to a top rate of 39.6 percent — would be taxed at 15 percent. Trump also would do away with the estate tax.

“Putting all that together, you are going to see a multitrillion dollar reduction in revenues,” Cole said, “considerably larger than the plans of any other Republican candidates to date.”

By comparison, for example, an analysis of Jeb Bush’s tax plan by the Tax Foundation concluded Bush would cut taxes by $3.6 trillion over the next decade on a static basis, but would reduce tax revenue by $1.6 trillion when factoring in the economic growth that the pro-business group assumes the plan would generate. Said Cole, “Trump’s plan is similar to Bush’s, but with larger rate cuts in every area.”

The Offsets

According to the Trump campaign website, the Trump tax cuts are “fully paid for” through three main revenue generators: “reducing or eliminating most deductions and loopholes available to the very rich”; a “one-time deemed repatriation of corporate cash held overseas at a significantly discounted 10 percent tax rate, followed by an end to the deferral of taxes on corporate income earned abroad”; and “[r]educing or eliminating corporate loopholes that cater to special interests, as well as deductions made unnecessary or redundant by the new lower tax rate on corporations and business income.”

In addition, Trump’s plan said it would “phase in a reasonable cap on the deductibility of business interest expenses.”

Notably, however, Trump said he would preserve charitable giving and mortgage interest deductions — two of the largest income tax deductions — which account for about 10 percent of all tax expenditures.

The mortgage interest deduction is expected to reduce revenues to the Treasury by nearly $70 billion in 2015, and by more than $1 trillion over the next 10 years, while revenues lost to charitable contribution deductions amount to about $54 billion in 2015, or about $745 billion over the next 10 years, according to the White House Office of Management and Budget. In all, tax expenditures cost the government $1.2 trillion in 2014.

Trump also plans to keep the earned income tax credit, which is expected to cause a revenue hit of $63 billion this year, and the child tax credit, which reduces revenue by about $46 billion.

But even if all of the exclusions, deductions and tax preferences were cut, Cole said, “it’s not possible to get there [to revenue neutral].”

One offset that will not raise much new revenue is one that Trump repeatedly has touted on the campaign trail: taxing “carried interest” earned by hedge fund managers’ portfolio profits as ordinary income rather than capital gains.

Capital gains are taxed at a lower maximum rate than most ordinary income, which carries a top tax rate of 39.6 percent. “The hedge fund guys are getting away with murder,” Trump said on CBS’ “Face the Nation” on Aug. 23.

When Obama proposed taxing carried interest as ordinary income as part of his 2016 budget proposal, the Joint Committee on Taxation estimated it would bring in an additional $15.6 billion over the next 10 years. But Trump is proposing a top rate of 25 percent. So under Trump’s plan, carried interest would be taxed at a top rate of 25 percent, rather than the current 23.8 percent. That’s not much of an increase.

In fact, most hedge fund managers may actually see an overall tax cut. Vox analyzed Bush’s tax plan, which similarly proposed to tax carried interest as ordinary income, but at a top rate of 28 percent. Vox concluded that most hedge fund managers would see an overall tax decrease because other parts of their income derived from a percentage of the value of their portfolios — currently taxed as ordinary income up to a top rate of 39.6 percent — would only be taxed at a top rate of 28 percent. That part of their income would be taxed at an even lower top rate — 25 percent — under Trump’s plan.

In other words, the so-called carried interest loophole that Trump has talked so much about repealing is not going to offset revenue losses much at all.

And because Trump would cut the pass-through business income rate by more than half, to 15 percent, it is that much harder for economic growth to make up for lost revenue, Cole said.

Williams, the Sol Price fellow at the Tax Policy Center, agrees the Trump plan could not be revenue neutral, as touted.

“On the face of it, it is a tax plan that is going to lose money [revenue to the Treasury],” he said.”The bottom line is that if you are going to do it by eliminating tax preferences, there aren’t enough preferences to make up for it.”

Take this example, Williams said: If someone makes $1.5 million in income, they are taxed at 39.6 percent on that last million. Cutting the rate to 25 percent means about $150,000 less in revenue to the Treasury. That person would have to earn $600,000 more per year to make up that lost revenue.

“There’s a lot of money disappearing,” Williams said. “There isn’t that much in tax breaks that he could take away.” Since Trump has said he would leave mortgage interest and charitable contributions alone, “we’re pretty much down to state and local tax deductions,” Williams said. There’s not enough there, he said, to boost your taxable income enough to offset the losses in tax revenue.

As a result, Williams said, it would require “substantial budget cuts” to make up for lost revenues.

 Budget Cuts

Trump said during his press conference and in the Wall Street Journal op-ed that he would cut spending. But Trump was short on details about how he would make such cuts, promising “disciplined budget management and elimination of waste, fraud and abuse” to achieve a balanced budget with the new tax plan.

Trump claimed there’s so much waste in the federal budget, he could make the necessary cuts without actually “losing anything” by way of services.

Trump referred specifically to “a 19-cent washer and it cost $900-and-some-odd thousand to send it from here to there.” It’s true that a South Carolina parts supplier fraudulently collected $998,798 from the Pentagon for sending two 19-cent washers to an Army base in Texas. The company and one of its owners were convicted of conspiracy to commit wire fraud and conspiracy to launder money.

Trump also cited the example of “hammers that cost $800 that you can buy in a store for a tiny amount of money” — a reference to a scandal over Pentagon spending on hammers in the early 1980s — and “a million dollars” spent on a soccer field at Guantanamo Bay (it was actually $744,000).

“We will run this country properly,” Trump said in his news conference. “There is so much money to be saved. We are reducing taxes, but at the same time if I win, if I become president, we will be able to cut so much money and have a better country. We won’t be losing anything other than we will be balancing budgets and getting them where they should be.”

As we have said, tax experts say Trump’s plan isn’t revenue neutral, so the promise to balance the budget would require even more spending cuts than under the current tax system. The Congressional Budget Office projects a $426 billion budget deficit in 2015.

Of course, there is fraud, waste and errors in any large organization, especially one as large as the federal government. According to the Government Accountability Office, the federal government in fiscal year 2014 made $124.7 billion in improper payments, up from $105.8 billion in fiscal 2013. But even if such errors were eliminated that would not be enough to balance the budget, let alone make up for lost tax revenues.

We take no position on the merits of Trump’s tax plan. But Trump has failed to provide evidence that he can keep his promise to cut taxes at the level he has proposed and raise enough new revenue elsewhere to make his plan revenue neutral.

— Robert Farley