The Donald’s 19th Century Plan Trumps 21st Century UniParty Economics

The Donald is slicing and dicing the Federal income tax nearly as fast as he served up fries at the McDonald’s drive-thru window last weekend. So far, he has proposed to extend the lower rates, family tax credits and investment incentives of the 2017 Tax Act after they expire in 2025 and to also exempt tips, social security benefits and overtime wages from the Federal income tax. Those items alone would generate a revenue loss of $9 trillion over the next decade, but he has recently proposed to also exempt firefighters, police officers, military personnel and veterans from the Federal income tax, as well.

We estimate the latter would cost another $2.5 trillion in revenue loss over 10 years. As it happens, there are 370,000 firemen, 708,000 policemen, 2.86 million uniformed military personnel and 18.0 million veterans in the US. These 22 million citizens have an estimated average income of $82,000 per year, which translates to about $60,000 each of AGI (adjusted gross income). At an average income tax rate of 14.7% these exclusions would generate $250 billion per year of reduced income tax payments.

In all, the Donald has thus tossed out promises to cut income taxes by $11.5 trillion over the next 10-year budget window. In turn, these sweeping reductions which would amount to upwards of 34% of CBO’s estimated baseline income tax revenue of $33.7 trillion over the period. Alas, even in the halcyon days of Reagan supply-side tax cutting no one really dreamed of eliminating fully one-third of the so-called crime of 1913 (16th Amendment which enabled the income tax).

10-Year Revenue Loss:

• Extend the 2017 Trump tax cuts: $5.350 trillion.

• Exempt overtime income: $2.000 trillion.

• End Taxation of Social Security benefits: $1.300 trillion.

• Exempt Tip income: $300 billion.

• Exempt Income of Firemen, Policemen, Military and Veterans: $2.500 trillion.

• Trump Total Revenue Loss: $11.500 trillion.

• CBO Income Tax Baseline Revenue: $33.700 trillion.

• Trump Revenue Loss As % of Baseline: 34%

Then again, the Donald may have something virtually epic in mind. To wit, scrapping the income tax entirely in favor of taxing consumption via levies on imported goods and merchandise.

“In the old days when we were smart, when we were a smart country, in the 1890s and all, this is when the country was relatively the richest it ever was. It had all tariffs. It didn’t have an income tax,” Trump said at a sit-down with voters in New York on Friday for “Fox & Friends.” “Now we have income taxes, and we have people that are dying.”

Actually, however, 19th century America was even smarter than the Donald realizes. In 1900 total Federal spending amounted to just 3.5% of GDP because back then America was still a peaceful republic and had no Warfare State or even significant standing army at all. And save for the most advanced precincts of Europe, the Welfare State hadn’t yet been invented, either.

So, yes, the so-called “revenue tariffs” of the 19th century did meet the income needs of the Federal government to the point of actually balancing the budget year-after-year between 1870 and 1900. Indeed, the actual annual surpluses were large enough to pay down most of the Civil War debt, to boot.

Today, of course, the Warfare State, Welfare State and the Washington pork barrels account for 25% of GDP. So the Donald may be directionally correct in wanting to tax consumption rather than income, but, as usual, he’s off by about seven orders of magnitude when it comes to the size of the Federal budget that needs be financed.