Double Play
Tax reform and a likely interest rate hike can revitalize the U.S. economy but are arousing concern elsewhere By Mei Xinyu
It would be incorrect, as some indeed have, to suggest that the top 20 percent of the U.S. population in terms of income, especially the mega rich, are set to benefit from Trump’s tax reduction, as this demographic is already well versed in the various ways to evade taxes and other financial obligations in their home country. It is therefore likely that neither the increase nor the reduction of the tax rate would resemble anything more than a token impact on their finances.
Taxes are not a burden to the lower 20 percent of earners within the population either because they have access to comparatively more government support and social aid than those elsewhere on the income ladder. Under a social welfare system heavily influenced by liberal principles, the actual income of those who are out of work and rely on unemployment relief can even exceed that of the traditional middle class, who contribute in terms of both labor and taxes.
By comparison, the traditional middle class is neither able to tap into the benefits of globalization, nor escape from the tax burden imposed by their home country. To make matters worse, they are the net contributors to the country’s social welfare system, bearing the majority of the tax burden while receiving relatively meagre support and social aid in return. The middle class has been able to overlook these injustices when the economy is booming and individual livelihoods are good. However, when times of economic recession come around, this inequality has the capacity to swell and intensify. In light of this, tax reform, together with the subsequent reform of the social welfare system planned by Trump, looks set to reverse this economic climate of unfairness and a decreasing enthusiasm for labor.
Tax reduction has a particularly significant role to play in the protection and encouragement of entrepreneurship in the U.S., as it is one of the most valuable characteristics of the American people. Since the end of the subprime crisis, the amount of small and micro manufacturing businesses without employees has skyrocketed, playing an indispensable role in the recovery of the U.S. economy. However, a decrease in the number of employees in the manufacturing industry over the decade is the dark reality of a more conspicuous trend of growth in small and micro manufacturing businesses.
There is no doubt that the marked increase in the number of small and micro manufacturing businesses without employees is a consequence of advances in manufacturing and information technology. Such technological progress lowers the cost barrier to manufacturing, therefore enabling those businesses to access the sales market, having been unable to enter the market prior to the 1990s.
However, the most critical factor in the boom is the fundamental spirit of endeavor and entrepreneurship of the American people. In the aftermath of the financial crisis, the U.S. economy has seen numerous cases of individuals taking their economic future into their own hands instead of waiting for opportunity to come their way. In contrast to Europe, the unemployment rate, more than twice that of the U.S., is persistently high, the individual agency of the U.S. people is to be acclaimed.
Admittedly, the products of their smallscale manufacturers are usually food, manually brewed beer, cosmetics and amongst others, but the unrefined nature of their industries shouldn’t be perceived as taking away from their success. It is inevitable that in the future, there will be Fortune Global 500 Companies emerging from this group of manufacturers, such is the entrepreneurial drive of the people, the enormous market in the country and the rags to riches miracles scattered throughout U.S. history. Nor should it be debated that tax reduction is indeed beneficial in the long run for these manufacturers and the socioeconomic vitality of the U.S.
From a macroeconomic perspective, the obstinate illness of the U.S. economy is the double deficit, the concurrence of both trade and fiscal deficits. Since the trade deficit is essentially a representation of negative domestic savings in the U.S., a phenomenon which stems from the fiscal deficit and the deficit of the household sector, it is possible to alleviate the double deficit quandary in the long run. This can be achieved by reducing the intervention of external forces and related inputs, reducing tax and reforming the welfare system, thus incentivizing labor as well as reducing wasteful expenditure.