The Taiwan Banker NO.95106.11 / Writer: Huang Ting-hsuan
How will Trump's tax plan affect the U.S. economy in the long run? Will it attract business and investment?American Experience
To boost the U.S. economy and American industry, U.S. President Donald Trump proposed a tax reform plan that focuses on lowering both the corporate and individual income tax rates. Trump's plan also calls for simplifying the tax code. In September, President Trump proposed a tax reform plan that aims to boost the U.S. economy and attract investment. Supporters of Trump's tax plan say that its benefits will be numerous: a reduced tax burden on America's lower middle class, simplification of the tax code, fewer companies moving overseas to evade taxes, and more domestic job opportunities - all while not raising the budget deficit. It is uncertain whether Trump's plan will be able to achieve its ambitious goals. Key policy points of Trump's tax plan The corporate income tax rate will decrease from 35% to 20%; some deductions will also be eliminated The Washington, DC-based Tax Foundation notes that after deductions are eliminated for companies, their effective tax rate will fall from 28.5% to 20%. The details of what deductions will be eliminated and the one-time repatriation tax are still unknown. Meanwhile, the Institute of Policy Studies (IPS) has researched firms that have paid a corporate income tax rate below 20% for more than seven years. The Institute points out that many companies avoid paying a higher tax rate by transferring increased earnings to the CEO's salary. They also buy back company shares to raise the firm's overall stock price. Despite paying a lower tax rate, the companies do not hire additional workers. Income brackets will decrease from 7 to 3 Currently, the seven personal income tax brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Under Trump's plan, the lowest rate would rise to 12%; the middle bracket would be a flat 25%, and the highest bracket would be reduced to 35%. Changing the tax brackets this way benefits moderate and high-income earners, and hurts the poor. It is worth pointing out that the affluent often earn their money from investments rather than income; they do not need to pay Social Security or Medicare taxes on their investments. Double-standard deductions Under Trump's plan, families will be able to deduct $24,700 from their tax bill compared to $12,700 now, while single people's deductions will rise from $6300 to $12700. But the individual exemption of $4050 will be eliminated, so some families with children will end up paying higher taxes. According to Slate Research, families with children whose annual income is $24,000 to $60,000 will end up paying higher taxes under Trump's plan. According to CNN Money, in the United States, the "middle class" is defined by a household income of $46,960 to $140,900. Under Trump's plan, more exemptions could be added in the future. Abolish the Inheritance tax and the AMT (Alternative Minimum Tax)The Inheritance Tax and Alternative Minimum Tax were established to ensure that the wealthy paid their fair share in taxes. Would eliminating them reduce the tax burden of the middle and lower classes or the affluent? The answer seems clear. Eliminate the state tax and local tax deductionsThese tax exemptions were created to allow some high-income states reduce the income tax. According to data compiled by the Government Finance Officers Association, some middle-class people with higher income do use this deduction. Critics say that the policy is weak and cannot lower the tax burden. Limit the pass-through entity tax rate Trump's tax plan would limit the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%. In fact, many such entities belong to the affluent, and serve as a means for them to evade the higher 39.6% rate on personal income. One firm that makes use of pass-through entities is the Trump Organization. Many uncertainties remain about other aspects of Trump's plan. Affluent earners will want to continue to benefit from loopholes such as those provided by real-estate loan interest and charitable donations. Cutting taxes may not boost the economy The Trump Administration says that lowering taxes will stimulate economic growth, forecasting 3-4% annual growth, which would be an improvement over the Obama years (2-3%). Yet many economists and other scholars doubt annual GDP growth will exceed 3%, because firms and individuals may choose to hold onto their savings, rather than spend them. Further, the Trump administration says that its tax reform plan will help to keep more companies in the U.S. Meanwhile, lower taxes will benefit employees, increasing their wages and creating more job opportunities, the administration says. Yet this is far from a sure thing. For a long time now, growth in corporate earnings has exceeded wage growth. Job opportunities and wages increase when firms expand their operations or receive new funding. To be sure, the world is well aware that some U.S.-based firms have high earnings and pay high taxes. The relocation of their corporate headquarters overseas remains a serious problem. Despite some attempts by the Obama administration to reverse this trend, such as by allowing interest accumulated on corporate debt to be deducted from the corporate income tax, U.S. firms continue to seek offshore tax havens for their headquarters. The Trump administration's bid to lower the corporate income tax reflects a renewed push to bring U.S. firms back onshore. Overall, Trump's tax reform plan is expected to provide major benefits to the corporate sector and affluent individuals. However, it is unclear whether the plan will lower the middle class's tax burden. Further, it will strain America's finances. Currently, the U.S.'s federal budget deficit for fiscal year 2018 is $440 billion, while the combined gross national debt exceeds $20 trillion. Meanwhile, the Senate Budget Committee estimates that reduced tax revenue under Trump's plan will reduce federal income by $1.5 trillion annually. If the fall in tax revenue is not countered by growth in other areas, it will be difficult to not increase the deficit - even if GDP growth hits 3% annually. Reducing debt and developing local infrastructure can bring stable growthFrom 1963-1971, economic growth in the U.S. exceeded 5% a year. A key catalyst for this long-running economic expansion was President John F. Kennedy's tax-cut plan, passed in February 1964, which slashed income tax rates 20-30% across the board. When President Ronald Reagan entered office in 1981, he soon encountered a serious recession. By lowering taxes, he was able to boost annual GDP growth to above 3% between 1983 and 1989. It's important to note, however, that the U.S. economy did not grow strongly in the 1970s. It also fell into a shortly after Reagan left office. This shows that relying on slashing taxes to boost growth can only work in the short term. When growth slows, further reducing taxes will not help. Currently, the U.S. economy is in the midst of a modest recovery. The IMF forecasts that annual GDP growth will be 2.2% this year and 2.3% next year. Overall, the global economy is growing. FactSet Research believes that consumption will rise worldwide - especially in China, Europe and Japan. Among the world's 15 largest economies, growth will be fastest in Chia and India, the IMF says. In the IMF's view, while the U.S. economy is stable, the nation should focus on reducing its debt, developing infrastructure, and improving the skills of the American workforce. Should the U.S. choose to pursue policies that will result in short-term growth, the economy may grow faster for a two or three-year period, and the stock market will do well, but overall, the U.S. economy will end up in a more precarious situation.