Mr trump’s tax cut

Mr trump’s tax cut

The success of his plan will depend on its ability to boost American worker incomes.
U.S. President Donald Trump’s tax plan, released as a brief one-page document this week, promises some bold reforms to rejuvenate America’s sluggish economy. Weak private investment spending has been at the heart of what is now dubbed the slowest U.S. economic recovery in the post-War era, which has been coupled with a serious slump in productivity. The plan does well in attempting to address basic structural problems that have held back the American private sector. However, its eventual success in reviving growth and productivity will depend on the extent to which its benefits trickle down from the balance sheets of big business to the real economy. The Trump administration has proposed steep cuts to the corporate tax rate (from 35% to just 15%), a significant reduction and simplification of the individual income tax, a doubling of standard tax deductions, and the scrapping of the wealth tax and the alternative minimum tax. Notably, the earlier proposal to impose a protectionist border adjustment tax has also been shelved, hopefully due to the administration’s realisation that trade tariffs don’t come with a zero cost on Americans. It is estimated that U.S. corporations have stacked a cash pile of more than $1.8 trillion overseas to avoid the corporate income tax. Mr. Trump hopes to push them to repatriate some of this cash stock after paying a minimal one-time tax.
Whether the likely inflow of capital will incentivise U.S. corporations to increase investments, or simply distribute the cash to shareholders through buybacks and dividends is an open question. In this context, another relevant issue is the administration’s own spending plans. The cut in the corporate tax alone is estimated to cost over $2 trillion, and overall the plan could lead to anywhere between $3 trillion and $7 trillion in lost revenue over the next 10 years. Whether the Trump administration will walk back on its initial promise to adopt a tax plan that is revenue and deficit neutral or cut down on spending to match lower revenues remains to be seen. Most recently, U.S. Treasury Secretary Steven Mnuchin argued that higher growth will help compensate for the revenue loss from tax cuts, suggesting a spending cut may not be on the cards. Mr. Trump’s bullish stance on infrastructure and military spending also suggests he is unlikely to reduce spending. This means that the real disposable income of Americans won’t receive any significant boost in the near term. Further, productivity improvements in the long run require improvements in general business freedom as well, not just tax cuts. Lastly, of course, Mr. Trump’s tax plan will require the approval of a Republican-dominated Congress that is filled with deficit hawks.