President Trump Pivots from Health Care to Tax Reform
Speaker Ryan pulled the American Health Care Act after failing to rally enough support from the House Freedom Caucus. The House Freedom Caucus consists of thirty fiscally conservative Republicans. The American Health Care Act would have rolled back much of the Affordable Care Act, or Obamacare. For the time being, President Trump plans to leave health care policy unchanged and to pivot to tax reform.
During the presidential campaign, candidate Donald Trump ran on tax cuts for individuals and businesses. Now President Trump is set to propose a broad-based tax cut to Congress. The Trump administration views a tax cut for individuals and businesses as an economic stimulus. However, if President Trump does not make offsetting cuts to spending, the deficit and debt will increase. The United States hit the debt ceiling earlier this month. A tax cut that increases the deficit and debt will be a nonstarter for many Republicans and even some Democrats.
What will Trump’s tax cuts look like? According to the Tax Foundation, individual tax brackets will be reduced from seven to three. For single filers, the highest tax bracket will likely be lowered to 33 percent from close to 40 percent. The middle tax bracket is likely to be 25 percent, and the lowest bracket will be close to 12 percent. The capital-gains rate will be reduced across tax brackets as well. Important deductions will also be adjusted. The standard deduction will be doubled, and child-care expenses will be deductible from taxable income. Lower taxes should give an additional lift to an improving consumer.
In 2016, the United States had the third-highest corporate tax rate in the world. President Trump plans to more than halve corporate taxes from 39 percent to 15 percent. Immediate depreciation is another important part of corporate tax reform. Under Trump’s plan, corporations could completely and immediately deduct new investments in plant and equipment. Current tax law requires depreciation be done over many years. A corporate tax cut should give another boost to business investment and raise worker productivity.
Multinational U.S. companies have avoided paying relatively high corporate tax rates by keeping more than $2 trillion of their profits overseas. President Trump plans to offer a one-time tax of 10 percent on repatriated earnings. Based on previous tax breaks for repatriation, the money may go into a mix of stock buy-backs and capital investment.
Another controversial proposal is the border adjustment tax. In effect, the border adjustment tax would be a tax on imports. For example, a company might import goods then sell the goods to American consumers. The company would not be able to deduct the cost of imports from its taxable income. The goal would be to incentivize domestic production over overseas production. AIER has consistently argued against protectionism such as this.
Assuming no offsetting spending cuts, the Tax Policy Center predicts Trump’s tax cuts overall will increase the debt and deficit. The center argues that the tax cuts are unlikely to increase economic activity enough to replace lost tax revenue.
