With the 2016 election resulting in a Republican majority in both the house and the senate, as well as a Republican president, talks of tax reform have begun spiraling around the hill. During his recent campaign, President Trump spoke frequently about his plans to conduct a major tax reform that saw many contradictory remarks leaving people to question what this tax reform will ultimately look like. CNBC reported that Trump plans to release a finalized tax plan after he and Congress deal with their plan to repeal and replace the Affordable Care Act, a task that has proven to be supremely complex. However, Speaker of the House Paul Ryan and other Congressional Republicans have laid out a tax reform plan that seems to be the most likely final product. Many of the provisions laid out by Trump and Congressional Republicans sound enticing. Less taxes means more money in the pockets of Americans for spending and boosting the economy, does it not? Unfortunately, it is not that simple and some of the proposed plans, in my opinion, will be ineffective in boosting the American economy.
Let me lay out some of these potential provisions, starting with some of the more notable portions. Congresses tax plan will lower the corporate rate from 35% to 20% (Trump initially suggested 15%) as well as lowering the tax on subchapter S corporations, businesses that pay taxes through the individual tax returns of the owners, from 39.6 percent to 25 percent. These tax cuts could open the door for companies to increase investments and boost capital. The Hill also reported that Trump campaign accepted the Congressional Republicans tax cuts on individuals. The tax cut will combine the seven individual tax brackets into three with rates of 33%, 25% and 12%. Trump, who during his speech to congress last month, stated that the tax reform will provide “massive tax relief for the middle class”. Analysis on the proposed tax reform has proven this statement to be far from true. In fact, most of the savings will be captured by the top 1%, as shown by the graph below from NPR.
Economists will agree that a tax cut will spur economic growth, but tax cuts must always be financed. Now, I could argue the amorality of tax cuts benefiting the wealthy this disproportionately, but what confuses me more is the way which the GOP plans to finance these enormous tax cuts for businesses and individuals. For starters, Congress is considering eliminating and/or repealing certain business expense deductions, including net interest expense and IRC 1031 tax-deferred exchanges which could lower corporate profits. However, more controversial than that is Paul Ryan’s Border Adjustment Tax. The BAT would place a 20% import tax on all goods and services entering the country and cease to tax exports, highlighting the, “America First” approach many GOP politicians are getting behind. Paul Ryan even states that this tax reform plan will not work without it. This does encourage businesses to stay in the United States and encourages investment, but hurts businesses that rely on imports and cheap labor abroad to make profits. This will undoubtedly raise the value of the dollar, increasing prices for the American consumer (most which are receiving only a minor tax break compared to the wealthy). The rising dollar also hurts competitiveness of our exports, shrinking the potential gain for those firms that would benefit most from the plan.
There are some obvious winners and losers from the tax reform, but the overall outcomes remain mostly uncertain. My problem with the proposed tax plan is that many of the things Trump and the GOP want to do to spur the economy are being negated by how they plan to finance it. More so, they may not even be able to finance it, leading to an even greater government deficit which is already entirely too large. I believe the benefits from the tax plan eventually go to the wealthy and hurt the poor, and lead to marginal changes in the state of the economy. I may not have a better plan, but I do not believe this is the correct one.