Trump right to slash taxes
NO one should dispute the boldness of the tax plan outlined by President Trump’s two main economic policymakers, Treasury Secretary Steve Mnuchin and chief economic adviser Gary Cohn.
Unveiled with minimal ceremony in the White House, the approach was unrecognisable to those of us who write about British budgets.
There were no costing details and little information on which income groups would fall within the new bands or which tax breaks and write-offs would be axed.
But the direction of travel was unmistakable. America’s overcomplicated tax system needs rationalising and headline rates are too high. The intention of the Trump White House is to produce reforms similar to those engineered by presidents John F Kennedy and Ronald Reagan to unleash higher productivity and growth.
What we do know from empirical experi- ence is that lower tax rates can unleash higher growth.
High taxes, as President Francois Hollande taught us in France, stifle enterprise and chase away entrepreneurs to cheaper tax jurisdictions. America’s exceptionally high levels of corporation tax have been instrumental in driving offshore an estimated $2trillion of profits earned by US companies.
Nevertheless, radical tax cuts of the kind advocated by the White House are not cost free. The difficulty is that the income generated by cuts doesn’t necessarily always cover the cost.
Reagan’s simplification unleashed a robust expansion but left the US with twin budget and balance of payments deficits.
There is no doubt, however, that over the longer term a looser fiscal policy does boost enterprise and output.
Trump’s advisers deserve credit for thinking boldly. The corporation tax cut from 35pc (and higher in some cases) to 15pc is a no brainer. No one wants a race to the bottom, but encouraging domestic and inward investment must be a good thing.
Abolishing death taxes and lowering capital gains taxes may benefit the rich, but in US society that is a class to which everyone aspires to belong. Reagan and Margaret Thatcher demonstrated that the uplift in output and stronger incomes can be enjoyed for decades.
In its analysis of the president’s tax plans, the New York Times made much of the fact that Trump, as a rich person, and his family would be huge beneficiaries. So presumably would be the super-rich main owners of the NYT – the Sulzberger and Ochs dynasties.
The better argument against the proposed tax package is the idea that over a decade it could add as much as $7trillion to US debt. Analysts say it is worrying because between 2006 and 2016 the national debt swelled from 34.8pc to 76.5pc of gross domestic product.
Numbers like this will worry the fiscal purists among Republicans. But they largely are pulled out of the hat because no one has fully done the maths on the tax breaks that will be abolished.
Nor have they assessed the value of the taxes repatriated to the US from overseas and collected at home in the future.
Distortions, such as the ability of individuals to write-off state and local taxes against income taxes, will also be removed.
Even a tame Republican-controlled Congress will not buy into every aspect of the Trump plan. But after years of pumping out money from the Federal Reserve, the time has come to let fiscal policy in the shape of lower and simpler taxes take the strain.