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Trump's alleged Christmas present

Trump’s alleged Christmas present

Tom Urbaschek
Tom Urbaschek is currently studying for his Economics and Business economics bachelor’s degree (BSc). Writing for Asset | Economics' Blog Committee is one of his extra activities alongside his study. Subjects of his interest are the fields of behavioural economics, marketing and macroeconomics.

If things are going according to plan for the Trump administration, which seems to be a rarity since the president’s inauguration in January, American citizens are to receive tax cut around Christmas. The alleged massive tax cut is primarily intended to benefit Americans with middle and low income, according to Trump. When we take a look at the concept of the different versions of this ‘Tax Cuts and Jobs Act’ however, one may ask the question who actually benefits.

The idea of a tax cut was blown into life during the 2016 presidential campaign. Trump promised that he would lower the tax rate for big corporations in order to give the economy a boost, arguing that wealth would eventually flow to households and individual consumers. Though neither Trump nor his administration used the term ‘Trickle-down economics’, the plan basically uses the same economic explanation. Trickle-down economics has never been proven however. In fact there are multiple studies that found a correlation between trickle-down economics and reduce in economic growth. Regarding the fact there is no solid evidence in current economic study, this tax reform presumably has a political motive rather than an economic one.

CBO table

According to calculations of the Congressional Budget Office (CBO) the tax cut gives significant tax benefits to Americans earning at least $100,000 a year, while the nation’s poorest would be hurt (CBO, 2017). As can be seen in the CBO table above, Americans earning less than $30,000 will be worse off under the tax bill by 2019. In fact by 2027, Americans earning less than $75,000 will be worse off. While these numbers appear to be harsh, one must keep in mind that the effect of health insurance is not excluded. The tax bill eliminates the requirement of health insurance, which leads to a lot of Americans leaving the insurance, therefore increasing the cost. This will lead to less insured Americans with low income, who generally receive the most health insurance premiums.

In addition, as stated earlier, the corporate tax rate will fall from 35% to 21% (Business Insider, 2017). The plan behind it is that the US gets more competitive with other countries, by stimulating big corporations to increase investment. However, when White House economic policy adviser Gary Cohn asked at the conference for CEOs the question whether the CEOs would increase corporate investment or give back to the consumer after the tax cut, almost nobody raised their hand (Salon, 2017). In this case, the created wealth would go straight to the stockholders. This could again indicate the political motive of the tax bill, or a different economic view. The latter could be the case, but the Republicans have yet to present economic evidence or theory to back their plan up. This situation gives some politicians and economists the impression there is none.

Lastly, the Senate is expected to vote on the tax bill on Tuesday and present it to the president the day after. The Republicans expect to have enough votes this time, after failing to several times. Worth noting is that all Democrats have consistently opposed the bill, while more and more Republicans supported it during its moderation. So when the tax bill passes, it will probably be with a small margin, and with as few as possible sacrifices for the Republicans.

Concluding, the ‘Tax Cuts and Jobs Act’ will presumably benefit Americans with a higher income level and hurt the lowest incomes. After multiple adjustments to the tax bill it looks like Trump has finally reached the finish line with his first major legislation. Although there is no solid evidence presented for some of the tax bill’s aspects, it will probably get passed, giving the business sector and Americans with a relatively high income an early Christmas present.

 

Reference list

Congressional Budget Office (2017, Nov. 26). Reconciliation Recommendations of the Senate Committee on Finance. Retrieved from the Congressional Budget Office website:
https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/reconciliationrecommendationssfc.pdf

Bryan, B. (2017, 16 Dec.). Republicans have a final deal on their tax bill – here’s what’s in it. Retrieved from Business Insider:
https://www.businessinsider.nl/trump-gop-tax-reform-bill-details-corporate-tax-rate-brackets-2017-12/?international=true&r=US

Sheffield, M. (2017, 17 Nov.). Ceos admit they won’t create jobs with their tax cut money. Retrieved from Salon:
https://www.salon.com/2017/11/17/ceos-admit-they-wont-create-jobs-with-their-tax-cut-money/

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