Flawed tax bill that benefits the rich and takes from the poorest
Dr Cherrie Short discusses the US Congress’ recent tax reform bill, aimed at speeding up the economy, creating jobs and increasing wages. But what are the downsides?
IN DECEMBER, the US Congress passed one of the most significant tax reform bills in decades, entirely along partisan lines.
The law significantly lowers the corporate income tax rate but also creates a massive additional federal government deficit, punishes citizens in coastal states with higher taxes, threatens the contributions to charities and non-profit organisations, and attacks the Affordable Care Act, also known as ObamaCare.
The Republican-sponsored bill, which was backed by President Trump, substantially lowers the corporate tax rate from 35% to 21%. Given that the US corporate rate was above the rate of most other industrialised countries, including the UK, this reduction makes some economic sense.
The idea behind the law is that reducing rates for businesses will help spur a faster economy, job creation and wage growth, suggesting that this economic boom will ultimately help all sectors of the economy in a “trickle-down” process.
Supporters argue that with more post-tax income, corporations will be less likely to leave the US and hopefully use the extra money to pay their workers higher wages.
One positive move in this direction is the recent decision by Walmart to increase employee wages as a result of the tax reform.
Unfortunately, the bill doesn’t eliminate the large number of corporate tax loopholes which would have been the economically efficient way to pay for this massive tax cut.
The law instead removes or restricts key deductions from the individual income tax, including the deductions for state and local taxes, the property tax, and the deduction for the interest paid on mortgages.
Since the coastal states, such as California and New York, which are mostly Democratic, have the highest local rates and most expensive mortgages, the citizens in these states will see their taxes increase and be hurt the most.
The law also temporarily reduces some of the rates for the seven individual income tax brackets but only through 2025, and it doesn’t simplify the tax code.
There are three other worrisome aspects to the law. The first is that the nation’s deficit is predicted to increase by $1.5 trillion within a 10-year window, as assessed by conventional methods. The Joint Committee on Taxation, whose director was appointed by Republicans, was willing to find that on a dynamic basis the deficit increase might be “only” $1 trillion.
It would also unleash a budgetary sequence of events cutting billions of dollars from Medicare and public health services.
The reductions would flow from a “pay as you go” law that basically requires offsets to increases in federal spending.
The second is the doubling of the size of the standard deduction where individuals do not itemise their deductions. The potential effect of this provision is that far fewer people will use the tax deduction for giving to charities and non-profit organisations but will simply take the standard deduction.
If this occurs, many local charities and non-profit organisations will see their contributions decline.
Third, the tax law repeals the Affordable Care Act’s individual mandate, a requirement that everyone must buy insurance or pay a tax penalty.
This mandate is important for a viable insurance system because it requires healthy people to buy insurance and thereby cross-subsidise those who are less healthly and cost the health system more money. While the move will save the government $338bn, it would be a significant blow to the Affordable Care Act, resulting in an estimated 13 million more people without insurance and higher average premiums.
Perhaps the biggest overall flaw in the tax bill is that it does not address the huge inequality of income in the country.
President Trump in November 2017 in a speech in St Louis stated that the tax bill “is riddled with loopholes for special interests, including for myself; in all fairness, it is going to cost me a fortune, this thing”.
He added: “Believe me. Believe me, this is not good for me.”
While it is impossible to say specifically how the tax reform law will affect Trump, since the President has never released his tax returns, most analysts believe that he will receive a large tax break, as will most of his wealthy friends.
Many of the critics of the tax law have argued that people with more money will benefit from the bill, while those at the lower end of the economic latter will be negatively impacted, thereby worsening the income inequality in the most unequal country in the modern industrialised world.