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Here's the catch with Donald Trump’s tax plan

Rick Newman
Senior Columnist

It’s fun to imagine: A nation in which half of all families pay no taxes, yet the government has all the revenue it needs and strong growth creates plenty of good jobs.

That’s the gist of Donald Trump’s tax plan, the third set of serious policy proposals from the Republican presidential candidate, after ones on immigration and gun rights.

The Trump plan is cleverly crafted to rev up voters while also answering policy wonks who criticize Trump for peddling slogans without details. It’s a serious plan, comparable in gravitas to those offered by Jeb Bush and Marco Rubio. And it follows through on Trump’s pledge to hike taxes on hedge fund managers who “shift paper around” and “get lucky,” which is sure to earn thunderous applause at Trump’s stadium rallies.

But Trump's blueprint for tax reform also glosses over the tradeoffs that would be necessary for the magnitude of tax cut he's proposing. You probably won't hear much on the Sunday talk shows, for instance, about the provision that calls for “steepening the curve of the personal exemption phaseout and the Pease limitation on itemized deductions.”

Borrrrrr-ing.

But those types of reforms are the crucial details that determine if legislation has a chance of getting through Congress or is dead on arrival. And they tend to provoke determined opposition from the most powerful lobbying groups in Washington.

A deep-dive into the details

Trump wants to replace the current seven tax brackets with four, the lowest being 0% for single filers with incomes of $25,000 or less and married couples with incomes below $50,000. Under this simplified system, Trump says, half of all households would fall into his 0% bracket.

The top rate for the wealthiest earners would drop from 39.6% now to a mere 25%. Trump would also trim the capital gains rate from 23.8% to 20%, while slashing the corporate tax rate from 35% to 15%. And he’d impose a discounted one-time tax of 10% on American corporate profits held overseas—which total more than $2 trillion—as an incentive for firms to bring that vast pile of cash home, invest it in the United States and turbocharge economic growth.

Since America’s national debt is now $18.2 trillion and there’s no money left to give away, Trump’s plan includes other measures he says will help pay for the tax cuts most Americans would get. Trump would end the “carried interest” loophole, which would be a de facto tax hike on hedge fund managers and private equity barons. Like virtually every other tax-reform plan—Republican and Democrat alike—Trump’s proposal would sharply curtail loopholes and tax breaks for corporations and other special interests. And he’d limit the total amount of tax deductions wealthy filers are able to claim.

But what about the nitty-gritty?

Like most other politicians, Trump offers broad ideas instead of precise details for how he’d raise hundreds of billions of dollars needed to plug the holes left by cutting taxes for the masses. But the general strategy is to reduce or even cap the amount of exemptions wealthy filers can claim, pushing their tax bill higher. Jeb Bush’s tax plan would do something similar, by capping the value of all deductions combined at 2% of adjusted gross income.

The severity of such caps, and the thresholds at which they go into effect, are the nitty-gritty, make-or-break details Congress will have huge brawls over if there’s ever a serious effort to streamline the overcomplicated U.S. tax code.

Modest caps and high thresholds might allow politicians to say they’re raising taxes on the rich, but they wouldn’t produce enough new revenue to make a difference. Stricter caps that sharply reduce the exemptions claimed by a significant portion of taxpayers can raise lots of revenue the government can spend on other things. But that would require cuts in cherished tax breaks that benefit the giant special-interest group known as the American middle class—a nonstarter during a presidential election.

Trump doesn’t specify the limits on exemptions that would be necessary to offer the kinds of tax cuts he favors, while remaining “fiscally responsible.” But he does say he wouldn’t touch the deductions for mortgage-interest or charitable donations, at any income level. That immediately rules out two of the largest potential sources of new revenue.

He doesn’t offer such protection for the deductability of state and local income taxes, or for employer-provided health insurance, which isn’t taxed the way income is--but could be. Yet that change, which could raise $250 billion in federal revenue per year, would likely meet ferocious opposition from an unlikely coalition of health insurers, labor unions and ordinary voters, all of whom would lose, were insurance to be taxed the same as income.

That’s why genuine tax reform is nearly impossible in the kind of uncompromising political climate that grips Washington: Somebody has to lose. A lot of somebodys, actually. Trump wants to target a few rich investors, but he’d have to go much further than that to exempt half of all households from federal taxes.

As an outline for a possible tax reform plan, Trump’s ideas echo those of some well-regarded economists. As an assessment of what it would take to cut taxes for the majority of Americans, it’s about as honest as a reality TV show. Oh. Right.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.