The Trump administration is proposing some big moves in the tax arena. On the surface, it looks great, but it may be overpromising its effect on the economy.
According to the White House’s website, the proposed tax plan promises to simplify the tax code for Americans.
- It will reduce the amount of tax brackets from seven to just three: 10, 25 and 35 percent.
- It will remove this weird “alternative minimum tax” rule, which requires taxpayers to prepare their taxes, again, under a different set of rules to keep people from gaming tax exemptions and deductions too much.
- It will double the standard deduction from $6,300 to $12,500 for single people and up to $24,000 for married couples.
- The 3.5 percent Obamacare tax will disappear, reducing the capital gains tax from 23.5 percent to 20 percent.
- The estate tax, sometimes referred to as the death tax, is also on the way out.
- It will slash the corporate tax rate from 35 percent to 15 percent.
These main changes are as drastic as the massive tax reform President Ronald Reagan pushed more than 30 years ago. The aim is to decrease the number of hours dedicated to preparing taxes each year, eliminate some of the benefits available only to the wealthy and kick-start some economic growth.
Any time we get to keep more of the money we’ve earned calls for a heel-click at the very least. The two tax cuts that will most directly affect us are the increases in the standard deductions and the decreased corporate tax rate.
The increased standard deduction
Though it isn’t necessarily a tax cut, increasing how much we can deduct from our income decreases the amount of taxes we owe on our income. Two-thirds of Americans use the standard deduction. The other one-third itemize their deductions in search of a larger deduction.
Itemizing is tedious and costly. Taxpayers have to keep more records and spend more money on tax preparation, and IRS agents have to spend more time looking through tax documents, wasting taxpayer dollars. By doubling the standard deduction, the 33 percent of people who itemize is estimated to drop to 5 percent. This is cool.
The decreased corporate tax rate
At 35 percent, the United States has the highest corporate tax rate out of all the developed countries in the world. Bringing it down to 15 percent would make it one of the lowest. The idea here is that due to globalization, it is easier to open up shop in countries all over the world. The lower the country’s tax rate, the more appealing it is to headquarter a business there.
Hundreds of companies, such as Burger King, Activis/Allergan and Frigidaire, have moved their headquarters to other countries where the tax rate is notably lower. Burger King’s new home is in Canada, where the corporate tax rate is around around 25 percent. Activis/Allergan moved to take advantage of Ireland’s 12.5 percent tax rate and Frigidaire, the maker of kitchen appliances, moved to Sweden in 1986 where the tax rate was 15 percent lower than in America.
By slashing the tax rate, American companies will certainly think twice about leaving to go elsewhere, and foreign companies will want to come here. This means more economic activity in the form of more jobs with higher wages, more production and more investment.
Though this tax reform is a good thing, there are tradeoffs. Fewer taxes means less revenue for the government, especially at the beginning. This is is OK as long as government cuts spending as well.
But it doesn’t look like it’s going to happen. Mercatus Center’s senior research fellow, Veronique de Rugy, though not concerned with the loss of revenue, is concerned with Trump’s “long list of stuff he would like to spend money on, such as a border wall, infrastructure and defense.”
Additionally, the promise that the tax cuts will pay for themselves with all the economic growth will likely underdeliver. For the last five decades, taxes have gone down, but so has economic growth. Though the low corporate tax rate should get more capital investment into the economy, we’ve been sitting on piles of capital for years now, and the economy is still growing slowly.
Cutting taxes, if not coupled with equal cuts in government spending, is only kicking the can down the road by ballooning the debt and making the next generations more FKD than we already are.
Previously posted at GenFKD.