Editors' pick: Originally published Nov. 14.Donald Trump's tax cut might ruin your credit rating.
Trump made his tax cut a centerpiece of his presidential campaign. Although the exact policy has shifted numerous times since the primaries, thePresident-elect Trump has consistently promised sweeping cuts for all Americans. The last president to run on a similar platform was George W. Bush, who made passage of his tax policies a priority for his early administration.
If Trump does the same thing, it's possible, if not likely, that his tax cuts will become law within the first several months of 2017. Although it's difficult to evaluate a shifting policy, we can make an educated guess from Trump's latest proposals.
And they'll be expensive.
According to most analyses, in their current form the Trump cuts would cost approximately $6.2 trillion over the next decade. With interest they will add $7.2 trillion total to the deficit, an increase of nearly 40%.
For the average taxpayer, this will create two concerns. First, few Americans who don't own their own business will see a meaningful increase in their take-home earnings. This is at odds with both Trump's rhetoric on the campaign trail as well as the expectations of his supporters, approximately half of whom reportedly expect him to raise taxes on the wealthy.
As explained by Howard Gleckman of the Tax Policy Center, in fact the planned cuts will direct almost all of their benefits to the top 1% to 10% of earners.
"It is extremely regressive," Gleckman said of Trump's plan. "The more you make, the bigger the tax cut. It's interesting for a guy like Trump who ran as a populist, and all of the rhetoric was that he was going to protect the little guys from all of the elites… So big tax cuts for rich people, big tax cuts for corporations? Again these are the entities that he bashed enthusiastically throughout the campaign. It's an interesting contrast."
If passed intact, Trump's plan will consolidate America's current system of seven tax brackets into just three, raising the lowest tier to 12% (up from 10%) and reducing the high end to 33% (down from 40%). Middle-income earners will pay 25%, while the standard deductions for both single and married filers will more than double.
For low-income taxpayers, those making less than $25,000 per year, this will amount to a tax cut of about $100, or a 0.8% bump to take home pay.
Middle-income taxpayers, those who earn roughly $48,000 to $84,000 per year, will benefit by approximately $1,000, or a 1.8% increase in take home pay.
High-income taxpayers will do considerably better. According to the Tax Policy Center's analysis, the top 1% of earners will get an average tax cut of $215,000, a 13.5% increase in take home pay.
Out of the total cost of these tax cuts, $1.55 trillion is earmarked for the wealthiest 0.1% of Americans. Half the cost of these cuts go to the top 1%. This is in addition to the administration's plan to end the estate tax, which only the wealthiest 1% of Americans pay.
"It is extremely generous to high income people," Gleckman said, "And one other thing I think is important is that the tax cuts aren't free. We run huge budget deficits already, and if you're going to run deficits it means we're going to have to pay for it."
Deficits could create another problem entirely for the average consumer.
Economists have long warned of the danger of running an economy that relies on too much deficit spending. The concern is that, among other risks, a government that issues too many bonds risks "crowding out" the private marketplace. It's an exotic risk, but one which may grow in relevance with a lump-sum ballooning deficit.
Crowding out happens when government bonds begin to outcompete the private marketplace.
If the national debt grows too large, the government will eventually have to begin increasing the amount of interest it pays in order to attract new investors. Traditionally government bonds are attractive primarily to safety-seeking investors looking to park their money, due to their absolute reliability and low rates of return. As interest rates go up, though, these rock-solid investments will increasingly become attractive to profit seeking investors.
When that happens the entire lending marketplace has to begin competing with government bonds. In this way, rising interest rates on Treasury bonds begin to affect products like mortgages, auto loans and even credit card rates, as day-to-day borrowers compete for a finite pool of lendable dollars against a Treasury that has now become attractive to investors seeking profit (rather than just stability).
For the average American, the upshot of a crowded out marketplace would be not only relatively minor returns on the tax cut, but also increasingly expensive debt as borrowers have to compete against a profitable market participant who lenders know will never default.
"Whichever way you go [cutting spending or borrowing money], you're going to hurt middle income people," Gleckman said. "Most of the benefits of government spending go to middle income people, and if you borrow $6 trillion, interest rates are going to go up as well."
"Raising interest rates will also make it more expensive to build those factories that Trump wants brought back to the United States," he added. "So it's a little misleading to focus only on the size of the tax cuts without acknowledging that those cuts have consequences."
However it is critical to note that there is no information on if or when "crowding out" happens. Government debt is still highly stable, and interest on it remains near historic lows -- so much so that many credible economists are still calling for debt-fueled investment projects such as those advocated by Trump. Still once interest rates begin to rise, they often spiral rapidly.
It is uncertain what a Trump Administration tax cut will, in its final form, actually look like. Although there is a proposal put out by the President-Elect while on the campaign trail, policies often shift once a candidate takes office. Perhaps more importantly, both the House and Senate Republicans each have their own tax policy that differs from Trump's and each other's, most notably in size.
It's likely that a tax cut will be one of the first priorities for the new government once it is seated this coming January. The exact nature of it remains to be seen; however, the package proposed by Trump would focus its returns narrowly on the wealthy, with relatively small rates of return for anyone else.