What Donald Trump’s ‘big beautiful tax cut’ means

By Prashansa Srivastava

The Republican Party and President Donald Trump passed the $1.5 trillion tax bill, the most sweeping tax overhaul seen in America in decades. This is the biggest legislative achievement of the Trump administration. The tax bill proposes to permanently slash corporate tax rates, provide tax breaks to owners of pass-through businesses, and temporarily reduce taxes on individuals. Most Americans will thus receive a tax cut in the short run.

Corporate America’s big win

With the “big beautiful tax cut”, corporate America emerges as the clear winner. The most significant reform is a massive corporate tax cut from 35 percent to 21 percent, which benefits the rich by boosting the value of their portfolios. American corporations abroad will no longer have to pay corporate taxes on money they claim to have earned abroad. This will encourage companies to keep income in foreign tax havens. According to the new tax provision, corporate income brought back to the United States will be taxed at between 8 and 15.5 percent, instead of the current 35 percent.

The new tax code does nothing to fix the earlier loopholes of the corporate tax code. The earlier 35 percent corporate tax rate was high. However, since the tax code was riddled with exemptions, US collections from its corporate income tax fell far below. The old tax code had companies paying an effective rate of 18.6 percent. With a lowering of the rate and no simplification of the tax code, the effective rate will now be significantly lower, allowing corporate America to make big gains. The pass-through provision as well allows the rich to take advantage of it as a tax break due to several loopholes present in its implementation. Structured companies can easily use this provision to make big gains.

The rationale behind the tax cut

The GOP argument here is that cutting the corporate rate significantly allows businesses to re-invest and grow, provide wage increases, and create jobs—thus leading to ‘trickle down’ benefits down the economic ladder. However, many economists are highly doubtful, since corporate after-tax profits are already at a historic high. This means corporations already have the income needed to spend on reinvestment and higher wages—they’re just choosing not to. Thus, the link between cutting the corporate tax rate and increasing jobs and wages is dubious, with many economists saying it’s not likely at all.

Impending fiscal deficit

With less cash flowing into the coffers of the federal government, a fiscal deficit is inevitable. The expensive tax cut will have a significant impact on debt and fiscal deficit. The US economy is one of the largest destinations for Indian exports, with an almost 11 percent share. A continued decline in the US economy does not bode well for India, as it decreases the demand for Indian exports and decreases the foreign income received by India. Other export-driven Asian economies will also be impacted by it, a number of which are among India’s top trading partners, which can further escalate India’s situation.

Income inequality

Income inequality has been on the rise in America for decades, with the rich getting richer and the middle class witnessing only meagre growth. The tax overhaul by the Republican Party will exacerbate these inequalities. In 2019, a person in the bottom 10 percent gets a $50 tax cut and a person in the top 1 percent gets a $34,000 tax cut. The middle class, on the other hand, will witness no change or in fact, may face an increase in taxes, leaving them with even lesser resources for growth. The nonpartisan Tax Policy Center estimates that the average break will be about $1,600 in 2018, but the biggest break, calculated as a share of after-income tax, will go to the families in the income bracket of $308,000 to $733,000. Those in the middle class will see a tax break of about $900, and lower incomes even less of a break. The tax bill thus tilts the economic field even more in favour of the already fortunate, by giving them a bigger share of the pie.

The accumulation of the nation’s wealth among the richest is not a new phenomenon. This tax bill will further widen the gap. Globally, it implies that the US is doing away with taxing multinationals. It will mark the start of the trend toward declining global corporate taxes. The benefits of globalisation will accrue more to multinational shareholders, instead of the public.

Budget cuts that worsen income inequality

The tax plan is expected to add more than $1 trillion to the American deficit. Republican leaders have already started identifying budget cuts to counteract this increase. However, the budget cuts will be on programs that those on the bottom of the economic ladder rely on the most: Medicare and Social Security. These entitlement programs benefit the poorest citizens by granting them rights to affordable healthcare and social insurance such as retirement, disability and survivors’ benefits. Thus, the tax bill essentially reduces taxes on the rich and attempts to cover for them by reducing the money needed by the elderly, the sick and the poor. Even if these entitlement cuts do not take place, America’s future generations will be saddled with a burgeoning debt.

Global impact of the US economy

Due to increasing global interconnectedness and muscle power of the US economy, developments in America’s economy have significant spillover effects around the globe. Given its size and the strength of its ties with the global economy, shocks to the US economy are transmitted globally through many channels. Fiscal imbalance and rising debt in the US can have negative impacts on the international economy. Persistent policy uncertainty can hamper growth throughout the global economy. This can have particularly adverse effects on investment growth in emerging market and developing economies.

If the tax cut is not counterbalanced by appropriate budget changes, America and the world could be facing a grave fiscal crisis in the future.

Featured Image Source: Wikimedia Commons