A tax cut that could change America forever

Glad tidings: Trump called the tax cut a "great big beautiful Christmas present for America".

A wage rise for all or simply a gift for the super-rich? Republicans passed their sweeping tax overhaul through the Senate at the weekend. It could reshape whole areas of American life.

Donald Trump has finally achieved something big as US president.

At 2am on Saturday morning, the Senate approved a gargantuan tax overhaul that is likely to be approved by the president by the end of the month. Shorn of the hiccups that have dogged Trump’s immigration and healthcare proposals, the bill has passed with such speed that many remain ignorant of its ramifications.

Much of it comes straight out of the Republican playbook. That means huge tax cuts which the President and the Republicans believe will boost an already growing economy. They include a reduction in corporate tax from 35% to 20%, and more modest tax cuts for individuals.

But the independent congressional watchdog committee on tax predicts that the loss of income to the government will not be fully made up by increased revenues from growth. It predicts a loss of about $1 trillion which could be added to the $20 trillion national debt over the next decade.

It is only a part of the Republicans’ never-ending battle to shrink government. The plan involves reducing spending on healthcare, education and social services.

This is a gigantic experiment in trickle-down economics, with the presumption that, as The New York Times puts it, “When people in penthouses get relief, the benefits flow down to basement tenements.”

The theory states that tax cuts targeted to the wealthy, with more disposable income, work better than general ones. It assumes investors, savers, and company owners are the real drivers of growth.

It is based on them using any cash from tax cuts to expand business growth, thereby creating more jobs for workers who will then spend their wages to further drive demand and growth; the new tax revenues will mean the original tax cuts are self financing.

But recent history suggests that when corporations get tax relief, it does not all go on investment and higher wages, but on bigger dividends to shareholders and more earnings in tax havens.

Is this just a wealth boost for the rich?

Festive gifts

The White House has said that the corporate tax cut alone could boost average wages by thousands of dollars a year. The cut will encourage companies to stay in the USA — or move there — rather than ship jobs overseas, thus ensuring unemployment continues to fall. And similar policies helped bring America out of recession in the 1980s.

But economists and tax experts are sceptical that the reform can achieve all that. According to Edward D. Kleinbard: “It’s not aimed at growth. It is not aimed at the middle class. It is at every turn carefully engineered to deliver a kiss to the donor class.” The bill could hurt healthcare and education, which are essential for a thriving economy.

You Decide

  1. Does trickle-down economics work?
  2. How much tax should the richest people pay?

Activities

  1. In pairs, perform a role play: one of you is wealthy, and the other poor. Take it in turns to make your case about whether taxes on earnings and profits should be increased or reduced.
  2. Do some research on what economists call the “Laffer curve”. How does it relate to Trump’s tax plan?

Some People Say...

“I would like to electrocute anyone who uses the word 'fair' in connection with income tax policies.”

William F. Buckley, Jr.

What do you think?

Q & A

What do we know?
Trump’s tax plans include a massive tax cut for companies. Republicans plan to lower the top individual tax rate from 39.6% to 38.6% and keep seven tax brackets for individual income taxes. We know that getting this bill through is arguably the biggest success of Donald Trump’s first year as US president.
What do we not know?
The motives. The great aim of the Republican Party has long been to shrink the state by reducing taxes and government activity. Supporters of these measures say tax cuts will stimulate growth and spending in the economy, while others believe it is simply a gift to the wealthy. We also do not know whether the relatively good economic news of the Trump administration will continue.

Word Watch

Senate
The Senate vote was 51 to 49, with every Republican but one — Senator Bob Corker of Tennessee — in favour. The bill had previously been passed by the House of Representatives, so the final stage is presidential approval.
Immigration and healthcare
Trump’s attempt to repeal and replace Obamacare collapsed in the summer, while he has made little progress on building a wall on the Mexican border to deter illegal immigrants.
$20 trillion national debt
The national debt is public borrowing by the government. It fills the gap between the government’s spending and revenues or income, and is justified by spreading cost over future years.
Trickle-down economics
Another term for this is “supply-side economics”. It is a form of “laissez-faire capitalism”. It aims to reduce tax to stimulate business investment in the short term and benefit society at large in the long term.
Edward D. Kleinbard
A former chief of staff at the Congressional Joint Committee on Taxation — the independent watchdog committee — who teaches law at the University of Southern California.

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