Policies that Matter: Trump’s tax reform

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Andrew Schillaci

If there’s one group of people that will benefit the most from President Donald Trump’s proposed $1.5 trillion tax plan over the next ten years, it’s the rich.

Analysis conducted by the Tax Policy Center found the average tax bill for all income groups would decline by nearly $1,600 in 2018, boosting after-tax incomes by 2.1 percent. Those with incomes above $730,000, or the 1 percent, would see their tax bill decline by $129,000, increasing after-tax incomes by 8.5 percent.

While the middle-class will be getting a slight tax break, the rich are getting even richer.

If this legislation gets passed at the end of the year, Lehigh graduates entering the job market will pay fewer taxes. However, our bosses will get a larger tax break than we will.  Although the middle class would praise Trump for a whopping $1,600 tax break, the reality is that the proposal would widen the income inequality gap.

The argument Republicans use to justify this proposal is that Americans will have more money in their pocket to consume goods and invest in the economy. In part, they’re right. Slashing the corporate tax rate from 35 to 20 percent will allow corporations to invest in new production facilities and create more jobs.

Companies like Apple, which have a $215 billion cash pile in Ireland, will have more incentive to return to the United States. Although Ireland’s corporate tax rate is lower than the proposed tax cut, American companies are facing increased pressure to pay fines and penalties to the European Commission.

A year ago, the European Union ordered Ireland to collect $14.5 billion in unpaid taxes from Apple. Apple has yet to pay any settlements, but the EU commissioner, Margrethe Vestager, is not giving up on taxing American companies.

It’s unlikely American companies who hoard cash overseas have any intentions of returning to the U.S. once the tax laws become more favorable. However, if Trump can get their money back to the U.S., the government could support tax cuts with the extra cash from overseas.

According to Moody’s, non-financial corporations hold $1.7 trillion in cash overseas, roughly the same amount as the proposed tax plan. If Trump can tax these companies in the U.S., the middle class will benefit. Not only will they receive tax cuts, but the government will also get extra income for things like infrastructure projects.

Getting American companies to bring their cash piles back to the U.S. is wishful thinking. In reality, the proposal is still in its early stages. Many of the smaller details have not yet been fleshed out, and it’s unclear how the policies will help the budget deficit. If the budget doesn’t improve in the near future, college students entering the workforce will have added pressure to repay their student loans.

The government is left with two options to balance the budget. College students are going to get taxed more, or federal money will stop being directed toward schools, wildlife parks, interstate highways and many more government programs.

Increase taxes or decrease spending.

If spending and taxes both decline at a fixed rate, the budget deficit will not change. Trump’s plan is to decrease spending at a larger rate than taxes. Hypothetically, the budget will be improved if funding to departments — for instance, agriculture, education and commerce — is cut by by $10 trillion, while the taxes will only be cut by $5 trillion. In addition, the spending cuts will be supplanted by the higher economic growth from the tax cuts — the deficit could hypothetically be reduced by $7 or $8 trillion.

That being said, it’s still unclear where the spending cuts are going to come from.

As part of the proposal, the Senate Energy and Natural Resources Committee and House Natural Resources Committee are instructed to draft legislation by Nov. 13 to reduce the deficit by at least $1 billion over the next 10 years.

This would allow the chairwoman of the Senate panel, Senator Lisa Murkowski, to open the Arctic wildlife refuge to oil exploration, which could have detrimental effects on the environment.

The proposal does have some aspects we know will have positive impacts on our tax system. The tax code will be simplified on the individual side, collapsing the tax bracket from seven options to three. The current top rate is 39.6 percent, and the lowest is 10 percent.

Under Trump’s plan, tax rates would be changed to 12, 25, and 35 percent, with Congress having the option of creating a fourth rate above 35 percent, if necessary. The middle class will benefit by doubling the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly, allowing people to avoid itemizing their taxes and claim credits and deductions.

The outcome of this legislation will define Trump’s first year in the Oval Office. He ran his campaign as a shrewd business man with promises to repeal and replace Obamacare, build the wall and lower the tax rate.

Trump has already whiffed on repealing and replacing Obamacare — twice. Hurricanes in Texas, Florida and Puerto Rico have taken attention away from any serious talks of the border wall. The tax proposal is his big chance to reach across the aisle and pass legislation that will fulfill at least one of his campaign promises. Another whiff means more firings and more questions about the competency of Trump’s administration.

A failure will hurt his legitimacy as president. A victory could mean a legislative rhythm that carries Trump into 2018.

Andrew Schillaci, ’17, ’18G, is a columnist for The Brown and White. He can be reached at [email protected]

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