Trump unveils ‘biggest tax cut in US history’
More than 40 years after it was first conceived, Donald Trump is reviving the so-called Laffer curve: the notion that lower taxes bring in more government revenue. Is low tax a good thing?
At a restaurant in Washington, DC in 1974, the economist Arthur Laffer met with two big-shots from 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.
With no paper to hand, Laffer took out a pen and started drawing on a white cloth napkin. That napkin is now displayed in the National Museum of American History, because what he drew changed the course of economic history.
Laffer’s idea was simple. He drew a curve, illustrating that no income from taxation will be raised at the extreme tax rates of 0% and 100%, and that there must be at least one rate — a ‘Goldilocks zone’ — which maximises government tax 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 in the maximum federal rate of corporate tax: from 35%t to 15%. The president says it will spur economic growth by encouraging spending and investment. It is also supposed to make the USA more competitive, encouraging businesses not to store cash overseas.
“The tax plan will pay for itself with economic growth,” Steven Mnuchin, the main architect of the plan, said this week.
The plan has been slammed by Democrats, who see it as “basically a huge tax cut for the rich”. Writing in The New York Times, Gail Collins believes: “The idea that huge tax cuts will gin up the economy so much that everything will balance out is a beloved fairy tale.”
The president would eliminate the estate tax and alternative minimum tax, a parallel system that primarily hits wealthier people by limiting the deductions and other benefits available to them — both are moves that would benefit Trump himself.
Even though politics is becoming less and less aligned along differing and opposing views on economics, 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 fundamental good, say some. It acts as a restraint on rampant 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 by law to give the government hard-earned income or profits. Governments, by their very nature, waste millions. But most importantly, 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.
- If you had to decide, are you generally a pro-tax person or an anti-tax person?
- What do you think is the right amount of tax a corporation should have to pay?
- 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.
- “Should the tax system consider the interests of the individual or the interests of society first?” Write a 500-word essay discussing and answering this question.
Some People Say...
“Taxation is theft.”
What do you think?
Q & A
- What do we know?
- Trump’s tax plans include a massive tax cut for companies. He also announced tax breaks for expenses on child care. And he will not support a controversial border tax, which imposes taxes on imports while exempting exports.
- What do we not know?
- The details, many of which Congress will have to thrash out. The big question: whether economic 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.
- What do people believe?
- Trump timed his policy in order to coincide with his 100th day in office (Saturday), a symbolic day when new presidents are judged on their early work. In the days leading up to his tax announcement, Trump had been criticised for failing on some of his promises.
- Two big-shots
- Dick Cheney, chief of staff, and Donald Rumsfeld, defence secretary.
- Gerald Ford
- The 38th president of the United States, Ford was in the White House from 1974 until 1977. He took over after the resignation of Richard Nixon, and is therefore the only person to have served as president without winning an election.
- Laffer admits that he did not invent the concept of the Laffer curve. Ibn Khaldun, a 14th-century philosopher, wrote: “It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”
- Goldilocks zone
- As the fairy tale says, conditions are “just right”. The term is also often used to describe the position of a planet in space that might support life; it is neither too near a star, nor too far away.
- Steven Mnuchin
- A banker and former hedge fund manager who is the treasury secretary in the US government, responsible for economics and finance.