Is Donald Trump right about taxing the rich?

Editor’s Note: Edward J. McCaffery is Robert C. Packard trustee chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of “Fair Not Flat: How to Make the Tax System Better and Simpler.” The opinions expressed in this commentary are solely those of the author.

Story highlights

Edward McCaffery: In the topsy-turvy world of tax politics, Donald Trump is making some good points about taxes

If Trump is serious about taxing the rich, he should advocate for a progressive spending tax

CNN  — 

In the topsy-turvy world of tax politics, here’s the latest twist: Donald Trump is making some good points about taxes.

Yes, you read that right. The Donald, in his typical staccato style, has started to spit out fragments of ideas about reforming taxes in America; specifically, lowering the corporate tax rate, eliminating gift and estate or so-called death taxes, and – wait for this one – raising taxes on the wealthy. The predictable snickers followed from all the right places.

Now the devil is as always in the details. Trump has a long ways to go in providing that – and what details do seem lurking beneath the surface hardly seem promising. But let’s not nitpick just yet. Trump ought to be applauded for throwing out some ideas – any ideas – about fundamentally fixing America’s flawed tax system. None of the many other Republican candidates seeking the presidency has done anything truly resembling that.

Edward J. McCaffery

And that is surely the first and most important point to make here. The mainstream political system – Congress, the president, committees, lobbyists and all that jazz – have become a large part of the problem of tax. Looking to these usual suspects to be part of the solution seems hopelessly naive. Traditional politicians offer tepid manipulations of the status quo in tax. It takes someone coming from and thinking “outside the box” to light the kindle of rage against tax as is.

We have seen this script before. Remember Ronald Reagan? When Reagan took office in 1981, the top marginal tax rate on income was 70%, as it had been since JFK cut it to that level in 1963. Five years later, in 1986, Reagan had the rate down to 28%. It hasn’t exactly stayed there, but the point is that Reagan – an unconventional politician – was able to go over the heads of traditional decision makers and make his case directly to the people. That’s being a Great Communicator. The income tax hasn’t really changed since.

Maybe, just maybe, Trump, some 30 years later, can give us more of the same – significant tax reform by taking his case to the people and forcing traditional law and policymakers to get on board.

Let’s get to those ideas. Each, individually, makes some sense and, collectively, could form a powerful vision of a 21st century tax plan for America.

One, lowering America’s corporate tax rate makes a good deal of sense and would be supported by most mainstream economists. The trouble today is that the U.S. corporate rate is now among the highest in the world, so companies explore various gaps in the tax base to avoid taxes.

One of these avenues is to move overseas, for there are plenty of jurisdictions with far lower rates, even ones at zero. No reform is going to bring trillions of dollars home, just like that – those devilish details, again – but sensible corporate tax reform entailing a lower nominal rate structure is clearly sensible.

So too, with idea two, eliminating “death” taxes.

These taxes raise little revenue, apply to far less than 1% of the population and can be avoided by byzantine tax planning that benefits no one except the financiers who manage the resulting trusts and foundations. Getting rid of these relics altogether makes good sense.

Which brings us to idea three: making the wealthy pay more.

Here, Trump’s one detail is silly and grandstanding: He is picking on hedge fund managers, who have found a trick, in “carried interest,” to defer taxes and pay capital gains rates. These are two benefits not available to working folks, who must pay their taxes now and at ordinary rates.

It is fair enough to think that this is a problem. There have been proposals to shut down this “loophole” in Congress for over a decade now. But the problem of under-taxing the rich hardly maps onto the problems of taxing hedge fund managers, who are but a small drop in the rich person bucket. Trump, for example, has ample billions without ever having to have become a hedge fund manager.

The good news is that there are very serious ways to tax the rich – like a progressive spending tax, as I and others have been advocating for many years. Such a tax would not burden work or savings (or dying, giving, or getting married, for those matters), but instead would fall on the private act of spending, at higher rates the more luxurious the spending level.

It would work like an income tax, but with an unlimited deduction for savings – any income that is not saved is, by definition, spent. Progressive rates would apply to the spending level. So, any one wealthy enough to spend more than a million dollars a year, say, would see his tax rate go to 50% or higher.

A progressive spending tax, by the way, would be consistent with each of Trump’s three primary ideas – lowering (or repealing) corporate tax rates, repealing death taxes (because dead men don’t spend – the heirs can be taxed when they do), and, of course, getting the wealthy to pay more.

Trump has a long way to go from his tax-policy-by-sentence fragments to anything like a real, practicable plan. But he has set forth some rather plausible ideas, and certainly some principles worth attending to. If this is all we get, and some more conventional politicians are stirred into some serious thought about tax reform, so be it.

When conventional thinking is part of the problem, we should be thankful for the unconventional voices still talking. So keep going at it, Mr. Trump.

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