The Republican candidate for President, Donald Trump, has proposed a set of significant changes to the federal tax code that would reduce the personal income tax rates, cut the corporation income tax rate, and abolish the estate tax.
In a companion study (Bachman et al., 2016b), we estimate that these changes would eventually raise GDP by almost ten percent relative to what it would otherwise have been. In this study we examine the distributional effects of the proposed tax changes, examining who would gain or lose, and by how much, if the changes were put into place.
The tax changes would provide modest relief to the poorest 40% of the population. The biggest relative and absolute gains would go to those in the top ten percent of the income distribution, while those in the “middle class” would also benefit to a moderate extent.
That the plan would concentrate the economic gains in the top ten percent should come as no surprise, in light of the expansive effect it would have on the overall economy. Policy makers face tradeoffs, one of which is that between the goals of expanding economic activity and of increasing income “equality.” The Trump plan expands economic activity largely by reducing taxes on capital, but, because ownership of capital is concentrated in the higher income brackets, high-income taxpayers naturally gain the most. We will see how Trump handles another tradeoff – that between expanding economic activity and raising tax revenue. Because tax cuts almost always cause a loss in tax revenue and because Trump makes very substantial cuts in taxes, especially taxes on capital income, it causes a substantial loss in tax revenue.
Our study is organized as follows: the details of Trump’s proposed tax changes are set out in Section 2, including an estimate of their revenue effects. We explain the methodology for measuring the distributional effects in Section 3, present the results tax by tax in Section 4, and combine the results in order to measure the overall impact in Section 5.