Trump unveils ‘biggest tax cut in US history’

The Laffer curve: George W. Bush called the idea “voodoo economics”.

More than 40 years after it was first thought up, Donald Trump is reviving the Laffer curve: the idea that lower taxes bring in more money for the government. Is low tax a good thing?

At a restaurant in Washington, DC in 1974, the economist Arthur Laffer met with two important members of Gerald Ford’s presidential administration. Unhappy at the president’s tax increases, he sought to persuade the two men of his case against high taxation.

Laffer’s idea was simple. He drew a curve, showing that no tax income will be raised at the extreme tax rates of 0% and 100% and that there must be one rate — a ‘Goldilocks zone’ — which maximises revenue. That is to say,higher tax rates do not necessarily result in more money for the government.

More than 40 years later, Donald Trump is reviving this theory. His headline plan is a massive reduction of the rate of corporate tax: from 35% to 15%. The president says it will spur economic growth by encouraging spending and investment.

“The tax plan will pay for itself with economic growth,” Trump’s treasury secretary, the main architect of the plan, said this week.

The Democrats are denouncing the plan, as “basically a huge tax cut for the rich”.

Politics is becoming less and less aligned along differing and opposing views on economics; but taxation is still one of the world’s most divisive subjects. Is tax essentially a good or a bad thing?

A taxing question

Taxation is a good thing, say some. It acts as a restraint on inequality, and the money spent by governments guarantees a safety net for millions of people. We should celebrate the good that tax does. As Oliver Wendell Holmes Jr. famously said, taxes are “the price we pay for civilisation”.

But others resent the idea of being forced to give the government hard-earned income or profits. High taxation, by penalising wealth, reduces enterprise, which in turn depresses job creation and wealth. Yes, some taxation is necessary, but it should be kept as low as possible.

You Decide

  1. If you had to decide, are you generally a pro-tax person or an anti-tax person?

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.

Some People Say...

“Taxation is theft.”

What do you think?

Q & A

What do we know?
That Trump’s tax plans include a massive tax cut for companies. He also announced tax breaks on child care.
What do we not know?
A lot of the details, many of which Congress will have to thrash out. The big question: whether growth will make up for the loss of revenue from lower tax rates. Whether Trump’s changes are motivated by personal gain, given that he stands to benefit.

Word Watch

Laffer
Laffer admits he did not invent the Laffer curve. Ibn Khaldun, a 14th-century philosopher, wrote: “At the beginning of the dynasty, taxation yields a large revenue from small assessments,” but it is the other way round at the end.
Gerald Ford
The 38th US president, 1974–1977, after Richard Nixon resigned; so he is the only person to be president without winning an election.
Goldilocks zone
As the fairy tale says, conditions are “just right”. For example, a planet able to support life; it is neither too near a star, nor too far away.

PDF Download

Please click on "Print view" at the top of the page to see a print friendly version of the article.