In line with Trump’s pre-election promises – and with all the pomp and circumstance we’ve come to expect from the new administration – the White House unveiled its plans to reform the US tax system this week.
Heralding ‘the biggest tax cuts in history’, the document itself was something of a damp squib – just a single A4 page summarising the main points of the reform agenda which would at a stroke simplify the US tax system, slash business taxes and consign inheritance taxes to history.
The devil is in the detail
The plan was light on detail but headline proposals include reducing individual income tax brackets from seven to three – 10%, 25% and 35% – and more than halving corporate tax rates from 35% to 15%, as well as moving to a territorial tax system and imposing a one-time tax on money held overseas. Some vaguer proposals included ‘providing tax relief for families with child and dependent care expenses’ and eliminating ‘targeted tax breaks that mainly benefit the wealthiest taxpayers’, though it’s unclear how these would be implemented.
Trump’s chief economic adviser, Gary Cohn, explained that the reforms were about ‘growing the economy, creating jobs’. Critics, however, are seeing it more as an expensive tax bonanza for the rich.
Accusations of personal gain
Naturally, accusations were also levelled at the president for initiating tax reforms that would heavily benefit his own businesses, and that of his billionaire-heavy cabinet; not least the proposal to cut the alternative minimum tax (AMT), which was introduced to prevent the super-rich from manipulating tax deductions to artificially reduce their tax liability.
Treasury secretary Steven Mnuchin and Cohn ducked questions about how Trump would personally benefit from the proposals, focusing instead on what they called a ‘once-in-a-generation’ opportunity to overhaul the tax system.
Where’s the money to fund the cuts coming from?
Mnuchin was also vague about how the cost of the tax cuts would be funded, commenting only that the administration was ‘working on a lot of details’ but that it was likely the cuts would pay for themselves through ‘growth, reduction of deductions, and closing loopholes’. There was no sign, though, of the border adjustment tax, championed by House speaker Paul Ryan and designed to offset any loss in revenue from corporate tax cuts.
The Committee for a Responsible Federal Budget (CRFB) believes Trump’s planned reforms would cost between $3-$7 trillion. Its analysis shows that a median $5.5 trillion spend would ‘increase debt to 111 percent of GDP by 2027…higher than any time in US history’.
Spend and save
Tax reform was one of the president’s major campaign threads, with promises to reduce the high corporation tax rates that he felt were suppressing business growth. However, he has also consistently pledged to make in-roads into the country’s $19 trillion deficit – a pledge that appears to run counter to the costs of the planned tax reforms which could add trillions more to the national debt.
In any case, the president’s tax reform plans will need Democratic support to pass and, in order to satisfy the government’s ‘reconciliation’ rules, will need to show that proposed tax cuts can be balanced with spending cuts. It’s a tricky equation.
There’s little doubt that effective tax reform that facilitates economic growth while cutting red tape and fairly balancing tax contributions across individuals and corporations would be welcome. It remains to be seen whether Trump’s new tax initiatives will deliver the growth without disadvantaging low and middle earners or further denting the national debt.