Trump Fb
Image source: Donald Trump.

With Super Tuesday now in the rearview mirror, the path to the presidency has been narrowed by a considerable margin for both the Republican and Democratic parties. But as the field narrows, the attacks on character increase a notch.

One example came from the GOP's 2012 presidential nominee, Mitt Romney, who explained to Fox News in a recent interview that:

"I think we have good reason to believe that there's a bombshell in Donald Trump's taxes."

Romney went on to say,

"I think there's something there. Either he's not anywhere near as wealthy as he says he is or he hasn't been paying the kind of taxes we would expect him to pay, or perhaps he hasn't been giving money to the vets or to the disabled like he's been telling us he's doing." 

As investors and taxpaying Americans, whether or not Trump has a "bombshell" in his taxes as Romney has suggested likely matters very little. But Romney was onto something when he suggested that a bombshell existed within Trump's taxes -- the only problem is he should have considered focusing on Trump's tax reform plan rather than Trump's individual tax returns.

Trump Fb

Image source: Donald Trump.

Donald Trump's tax plan
Trump's tax plan primarily involves reducing taxes to spur economic growth and investment. He wants to simplify the tax code, reduce ordinary income taxes and capital gains taxes for the vast majority of Americans, and also give corporations an incentive to innovate within the United States.

As we examined previously, we'd go from our current seven-tiered progressive income tax brackets to just four, with Trump touting that no individual earning less than $25,000 annually, and no families earning less than $50,000, would owe any ordinary income taxes. Since the average annual household income in the U.S. is about $51,000, Trump would ensure that around half of all households pay no ordinary income taxes. Trump believes this would put more money in the pockets of the American consumer, which is a good thing considering that roughly 70% of U.S. GDP is based on consumption.

Another major point of Trump's tax plan would be to lower the corporate tax rate from its current rate of 35% to just 15%. Doing so would, in theory, make the U.S. a highly competitive place to do business and invest. It would also allow businesses to keep a lot more of their profits, which they would presumably use to expand their business, hire, invest in new capital, and perhaps ,in the case of publicly traded companies, boost payouts to shareholders.

Taxes Pixabay

Image source: Pixabay.

Other components of Trump's plan include a temporary tax holiday for foreign profits at a rate of 10%, which would allow some of the more than $2 trillion in corporate profits held in overseas markets to be repatriated; the elimination of the Alternative Minimum Tax; and an end to the net investment income surtax, which is a 3.8% tax added to capital gains of individuals with incomes in excess of $200,000, and married couples with incomes over $250,000. 

The real Trump bombshell we should be talking about
On the surface there are some intriguing proposals here. More money in the pockets of Americans should translate into more consumption, as well as more investment. Presumably, if the American taxpayer can hang onto more of their earned income, they'll have a more comfortable retirement (assuming they invest for the future).

Likewise, a lowered and simplified tax code for corporations would encourage capital investment and reinvestment and may even attract foreign businesses to invest in the United States.

But Trump's tax plan also contains a potentially enormous bombshell. Putting money in the pockets of the taxpayer and corporations means removing it from the pockets of the federal government. Estimates on the tax reduction vary, but the common theme is simple: there would be a drastic reduction in funds for the federal government to work with.

The Tax Policy Center suggested a $9.5 trillion revenue reduction over the next decade, or, in another context, the elimination of 22% of federal revenue over a 10-year period. The Tax Foundation modeled a $12 trillion decline in tax revenue over a 10-year period, although once its dynamic modeling was put into place taking into account the positive job, wage, and economic growth effects of Trump's tax plan, a more modest $10.1 trillion net reduction in federal tax revenue is expected.

Images
Image source: Pictures of Money via Flickr.

The concern with such a large chunk of revenue being taken away from the federal government is that it does absolutely nothing to address the federal budget deficit or national debt, which is now over $19 trillion, or nearly $59,000 in debt per every citizen, man, woman, and baby, in this country. In fiscal 2016, $283 billion of the $3.8 trillion budget was apportioned to pay interest on our national debt. Interest on our national debt is the fifth-leading expense in the national budget, behind only healthcare (i.e., Medicare and Medicaid), Social Security, national defense, and income security (i.e., food and nutrition assistance, education, child care, and tax credits).

If nothing is done to bring the federal budget deficit toward some degree of balance, and the existing national debt levels are swept under the rug, Trump's tax plans could substantially add to the national debt levels in the next one or two decades. The Tax Policy Center foresees an additional $11.2 trillion being added to the national debt by 2026, and $34.1 trillion being tacked on by 2036 if Trump's tax plan remains in place. A decade from now we'd be looking at $450 billion in annual interest payments on our national debt, and by 2036 it would rise to almost $800 billion per year. Even if these are nothing more than estimates, and estimates are indeed subject to change, they're terrifying, especially after witnessing the issues select EU nations have struggled with when burdened with high levels of debt.

It's likely that we'll hear more about Trump's tax plan in the coming weeks and months, but as concerned investors and taxpayers, this is the bombshell that needs addressing.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy