President Trump’s Promises and Truth from the Perspective of Tax Policy (Continued)
During the 2016 presidential election, President Trump advocated large-scale tax cuts which was Republican traditional policy, aiming to encourage economic growth and increase employment. He promised to reduce corporate tax rate from 35% to 15%, and simplify personal income rates into three tax rates, and review the estate tax etc.
Trump Administration and Republican Party passed the Tax Cuts and Jobs Act at the end of December 2017 and implemented it from January 1, 2018.
It was large tax cuts of about ＄1.5 trillion in 10 years since 1986 Reagan’s Tax Cuts.
The point of the tax law is as follows.
(1) corporate tax rate reduction from 35% to 20%
(2) elimination of taxation when returning overseas income, and one-time taxation of overseas assets
(3) reduction of maximum income tax
(4) reduction of estate tax
(5) repeal of the penalty on health insurance non-members
What is the economic effect of the tax cut?
Trump Administration took a bullish view that real GDP growth rate was 3.1% in 2018 and would continue to exceed 3% by 2020. But nonpartisan Congressional Budget Office predicts that real economic growth rate will drop to 2% in 2019-23, and to 1.7% in 2024-29. (The Budget and Economic Outlook:2019-2029)
Trump Administration asserted that tax cuts and deregulation would encourage economic growth and tax revenue increase, then improve budget balance, and pay off debt in 8 years of his term. But corporate tax revenue fell 22% and 2018 budget deficit was＄77.9 billion, an increase of 17% over the previous fiscal year. The Congressional Budget Office predicts that the budget deficit will be ＄896 billion in FY 2018, over ＄1 trillion in FY 2022, 1 trillion 310 billion in FY 2029. CBO also predicts that government debt will increase from ＄15.8 trillion in 2018 to ＄24.6 trillion in FY 2026.
In addition, Trump Administration asserted that the Tax Cuts and Jobs Act was for the middle class and smaller businesses. But according to the Tax Policy Center Report : “Most of Tax Reduction Benefits Go to the Wealthy”, even if the Tax Cuts and Jobs Act was fully implemented, 99.2% of tax reduction benefits go to top 5% household (wealthy) and the third quintile (middle class) decreases tax benefits by 2.1%.
Trump Administration’s reduction policy will have poor or undesired results in the long-term even if it has some short-term effects. That is the truth.
(Author: Masatoshi Katagiri)
This essay is the English version of No. 30, June 26, 2019 on the Japanese website.