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Tax Cuts and Jobs Act: Yea or Nay

On December 20th, 2017, after the passage of the Tax Cuts and Jobs Act, the federal corporate tax rate is now reduced to a flat rate of 21%, effective as of January 1st, 2018 in the United States. This is the largest tax cut in the bill, with the top rate being previously at 35%. Changes were also made in business interest deduction, accounting of new investment purchases, net operation losses and R&D expenditures.

While the senate Republicans claim that the bill would be practically paying for itself by the growth it will enable the American businesses – and at the same time benefit lower-income Americans; it is still a controversial subject for people all over the world. Main criticism of the renewed legislation is that rather than helping the common people, this bill is allowing the rich to become richer by dodging billions in taxes. In reality, there are two main ways in which a corporate income tax cut can positively affect a blue collar worker: either higher wages or lower prices resulting from lower costs of business with the tax cut. Will the benefits of this cut reflect to the workers, or will it be a favor from Donald Trump to his golfing buddies? Only time will tell. According to the Senate rules, changes to the corporate taxes are permanent. That is, they are not going to expire after 2025 like the changes in individual tax rates within the bill, making this an even more intricate issue. Politicians and economists alike are arguing what this bill would mean for the taxpayers and the US and global economy.

Taxes are now a very “now” subject with never ending tax avoidance schemes surfacing one after another, from Panama to Paradise Papers. It is no doubt that this new bill will be just as notorious.

A tax cut by itself is pretty straightforward; it is a reduction in the rate of tax charged by a government. Its long term effects, however, are not as predictable. Immediately after the tax cut, the real income of the taxpayers increase and real income of the government enforcing the tax cut decreases. It all comes down to how the additional income that was created through the tax cut is made use of. Taxpayers might use the additional income to stimulate economic activity such as expanding their businesses or making new investments, but they could also choose to simply save it. CEOs of multiple large corporations including Pfizer, Cisco, and Coca Cola declared that they would pay dividends or buy back shares of stock with the additional cash, instead of hiring more employees like Trump presupposed. Skepticism from all sides stem from this unpredictability and the newly set into motion TCJA is objected on many fronts. Main opposing arguments include:

TCJA will be increasing debt and the budget deficit even more. The tax cut is predicted to add 1.5 trillion US dollars to debt held by the public in the next decade and increase the debt to GDP ratio even more.

TCJA will increase taxes for the middle-class, eventually. To set off losses in result of tax cuts for the corporates, middle-class will be having increased taxes by 2027, according to the Senate version of the bill (though, they were not as straightforward with the reasoning behind it).

TCJA’s expected effect on economic growth and wages is inflated. The Administration is pretty confident that the lower taxes will bring with it higher investment and higher wages. Economists are not as self-assured. Federal Reserve Bank of New York CEO, William C. Dudley commented: “While this legislation will reduce federal revenues by about 1 percent of GDP in both 2018 and 2019, I anticipate the boost to economic growth will be less than that. Most importantly, most of the tax cuts accrue to the corporate sector and to higher-income households that have a relatively low marginal propensity to consume. This suggests that a significant portion of the tax cuts will be saved, not spent.”

TCJA benefits the privileged, including the Trump family and some Republican congress members, increasing the income and wealth inequality. The bill is criticized for its focus on eliminating taxes that target people in the top tax brackets such as the Trump family and many members of the congress. An example to that is the estate tax which the

TCJA eliminated, applicable to people who inherited a wealth above 11 million US dollars as a married couple (not an everyday event for most Americans). Pre-TCJA taxes are already below global tax standards. Reports by the OECD show taking into account of both individual and corporate taxes, measured as a percentage of GDP, the US tax burden is below average.

China reflected that they were well aware of the overseas impact of the tax reform when it was first introduced, and pledged to taking proactive measures to make sure it would not impair China’s global competitiveness. The objections to the bill echoed in Europe as well, a letter was written to the US Treasury Secretary Steve Mnuchin by the governments of the UK, France, Germany, Spain and Italy, voicing growing worry on how the TCJA may be detrimental to global trade. According to the letter, the tax reform is in violation of the World Trade Organization rules.

The list goes on, and yet the bill is already signed into law on December 22, 2017 by President Donald Trump. The real consequences of the bill, be it good or bad, is to surface throughout this year. Nevertheless, a shift this size in the tax law is bound to have some repercussion on the American legal precedent and economy, long after the bill has been deep in history’s pages.


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