It’s been roughly a year that Donald J. Trump has been elected president and one of his campaign promise, an overhaul of the US tax system, has still to be passed. Luckily (or not), the Republicans presented the Tax Cuts and Jobs Act recently, a legislation they hope to pass before Christmas however unlikely as an orderly opposition is preparing to fight on every item of the bill.
The plan, as it stands now, is forecasted to increase US debt by more than $1.5tn according to the Joint Committee on Taxation, raising further concerns on both sides of the political spectrum about the already explosive path of the national debt.
Furthermore, the bill is heavily weighted toward businesses, which would receive about $1tn in net cuts. The major proposal is the reduction of the corporate tax rate from 35% to 20%, which is more symbolic than anything else, as although the US has one of the highest corporate tax rates in the world, the majority of large companies generally don’t pay more than 15%, thanks to loopholes and very good tax lawyers. On the other hand, Trump tax plan is to lower the corporate tax rate for small businesses to 25%, a very good news for these firms which represent 99.7% of US employer companies. Lastly on the corporate sector, the bill aims to encourage US companies which hold cash offshore, in other countries, to repatriate it through the instauration of a one time 12% tax on liquid assets held overseas (instead of the full 35%). Indeed, Republicans believe that if at least some of the $2.6tn foreign cash held by firms is sent back to the US, it would be used for investment and job creation. However, as smart as it might look, it is a wrong move, as it entices companies to keep their foreign earnings offshore until another tax holiday is passed by a future government. Moreover, in 2004, the Bush administration did the same and most of the cash repatriated went to shareholders and not to hire employees and boost the economy.
On the individual side now, Trump’s plan will mainly benefit rich people like him, but some measures are well thought. Indeed, the Tax Policy Center estimates that about 25% of the benefits of the tax cuts would be seen by the bottom 80% of the American economy, but another 25% would benefit the top 0.1%. The proposal will double the real estate tax exemption from $5.5m to roughly $11m, essentially meaning fortunate families will be able to avoid paying taxes on large inheritances. It also eliminates the alternative minimum tax, which exclusively benefits households with incomes over $200,000. On the other hand, the plan will reduce income tax brackets to four (12, 25, 35 and 39.6%), down from the eight that exist now. Basically, married individuals earning less than $24,000 will not pay any taxes, which roughly doubles the standard deduction for middle-class families (which stands at $12,700 now). However, the top bracket for those earning in excess of $1m will remain unchanged. Whilst it also increases the tax credit available for each parent and non-child dependent from $1,000 to $1,600, it tightens the rules to claim child credit, a measure likely to hurt immigrant parents whose children are born in the US.
To conclude, this plan will largely benefit the rich and large corporations, blunting any demand impact that a well thought tax plan could have had. Indeed, this administration is relying on supply side economics that worked during the Reagan era when the top tax rate was 70%, but not anymore. It doesn’t matter how low taxes are, people and companies will not invest until they see demand for their products, and this is highly unlikely to happen when most of the tax cuts don’t go to poor and middle class Americans, those who spend the most of their income.