Donald Trump released a painfully vague tax cut plan that aims to cut various taxes by a significant amount in order to boost economic growth; however, such a large cut will likely do the opposite.
The President’s tax plan calls for slashing corporate tax on businesses from 35% to a mere 15%, as well as removing the seven tax brackets for individuals and replacing them with three: 10%, 25%, and 35% respectively. According to the one-page plan, the main goals are to grow the economy and create millions of jobs, simplify our tax code, lower the business tax, and provide tax relief to American families.
Unfortunately, the majority of the details regarding the tax cuts are unknown, such as how exactly the government will be able to achieve the goals outlined. If passed, it will become one of the biggest tax cuts in US history, and will likely cause more harm than good.
What will be the effects of the tax cuts?
Due to the sheer simplicity of the plan, I have stated concerns that are likely to arise from the implementation of it.
1. Loss of government revenue and a huge deficit
The fact of the matter is that lowering taxes comes at a price, whether it is related to income tax or corporate tax. While it is true that individuals now have more disposable income to spend on goods and services, there will also be a higher government deficit because the government now has less money in revenue to spend for citizens. The result is a trade-off between the spending of goods and services by consumers and the spending of goods and services by the government. With the tax cut, the government is expected to lose about $2-$7 trillion over the next decade– money that could be spent on bettering the welfare of citizens.
Higher interest rates are also expected to arise, which leads to an increase in the cost of borrowing. A small decrease in taxes is beneficial for the economy in the sense that it acts as an expansionary fiscal stimulus by increasing the incentive for people to work. However, with a tax cut as big as Trump’s proposal, the tax cut would increase America’s debt to 111% of GDP by 2027, and according to various economists, no amount of achievable economic growth would be able to finance it. Therefore, Trump’s proposal is likely not revenue-neutral because the increase in economic growth will not make up for the loss in government revenue.
2. Burden of corporate tax shifts to smaller sized businesses
While the corporate tax rate will be cut to 15%, this will not apply to businesses such as partnerships, sole proprietorships, and other pass-through firms. This means that while multinational corporations will reap all of the benefits from the tax cut such as higher profits and increased competitiveness of firms, smaller businesses have to pay the full 35% in taxes. This could lower the incentive for new businesses to open, and may not actually act as an economy booster.
It is unclear whether the corporate tax cut will actually lead to more jobs; on one side, corporations now will spend more on Research and Development, new innovations, and hiring new workers. On the other hand, an increase in profits may simply mean additional money being delivered to top management and shareholders. Donald Trump’s priority may very well be reducing the amount of taxes he has to pay for his own companies to simply stack up higher profits.
3. Tax cut will benefit the 1% and harm the most vulnerable
Consolidating the seven tax brackets for individuals and reducing them to three will simplify the current tax code in America. While this reform will allow higher-income earners to pay much less tax than before, lower-income earners would actually see their taxes increase. For example, individuals making $413,350+ are currently in the 35%-40% tax bracket. Under Trump’s plan, these same individuals now only have to pay 33% in income tax, which is a significant 2%-7% decrease. However, individuals who are currently in the 10% tax bracket would see their tax go up to 12%, and they are now effectively paying higher taxes.
Ironically, Trump stated that the tax plan would “reduce taxes across the board, especially for working and middle-income Americans.” However, the fact is that middle-income earners will be relatively unaffected by the plan, with the ending result simply harming the lower-class and benefiting the top 1%.
It is clear that Trump’s tax cut plan is poorly planned and does not take many factors into consideration. The President’s claim that the plan will spur the economy is doubtful and will likely do more harm than good in the long run.