The recently unveiled tax overhaul matches Donald Trump’s presidency: It was pompously described as “the biggest tax cut and the largest tax reform in the history of our country,” a proposal with little details and exaggerated expectations.
If anything can be anticipated, as in the past, is that it will lead to gigantic federal deficits by reducing the government’s revenue and lead to entrepreneurs like the president reaping the biggest benefits.
The proposal is a simplification of individual taxes, and it expands on initial deductions and eliminates others. It does away with the estate tax and the alternative minimum tax (ATM,)which currently guarantees that a minimum payment is imposed on the wealthiest. The latter is one of Trump’s most hated taxes.
In the business sector, the proposal includes a reduction from 35% to 15% for large corporations, small businesses and other large owner-operated conglomerates, as is Trump’s own real estate empire. The Treasury could be obtaining an estimated $4 billion less in revenue.
The White House is not proposing an alternative to replace that income. The expectation is to see sufficient economic growth and, as companies keep more money, that they will invest and hire more, enough to improve the economy and generate more taxes.
The problem is that this theory has not worked from the 1980s to our day. Whenever it was implemented, it led to large deficits, which in turn gave way to cuts on social programs.
The last time a tax cut effectively brought about an economic boost was in the 1960s, when tax rates were reduced from 90% to 70%. Today, percentages are very different.
On the other hand, it is also incorrect to think that saving businesses more money will lead to more job creation. Usually, sales are what lead to more production and employment, not the other way around.
In the past, tax cuts served to reduce the size of the government rather than as an economic incentive.
The tax cuts presented yesterday by the Trump Administration are irresponsible. They have all the ingredients to repeat the cycle in which the poorest end up paying money going to the wealthiest.
Crafting tax reform is complicated. There are many interests at stake. This one lends itself for long negotiations whose end result is unpredictable.
The plan is an initial proposal allowing Trump to say that he did something about taxes in his first 100 days. It is also a disastrous plan to start the debate.