Sunday, December 3, 2017
Trump's Taxes: A Macroeconomic Look at the New Tax Policy
The highly discussed and viciously touted tax plan set forth by the Republicans has finally come to fruition in recent days. In order to understand the effects of this new tax policy, the Tax Policy Center, an independent think tank group, did the numbers to see what the effects of the new tax plan will likely be.
Within their study, the researchers looked at the effects on aggregate demand as well as savings and investments, output, and the labor market. The decrease in the corporate tax rate was viewed as a positive, yet there were concerns it would have its own repercussions. The loss of revenue from the corporate tax rate reduction was seen as a likely cause to worry, as the deficit would grow at a faster rate. However, according to the projections made by the Tax Policy Center, it would actually slow the growth of the deficit by nearly 213 billion dollars over the next 20 years. This combats with previous arguments made about the increase in the size of the deficit due to the tax rate loss.
Another point worth discussing is the increase in output seen within the GDP, with an expected growth of 0.7% the first year, and a decreasing rate every year until it reaches about 0.0% in 2027. This is much less than what the Republicans have stated it will do for the economy.
Even without the benefits from the growth in the GDP, the study points out there are massive benefits from the new tax policy. The inversion of many U.S. companies has been a hot topic within the political atmosphere lately. This new policy will help to eliminate this continued inversion and avoidance of the United States taxes. Corporations may return to the United States, but it is not guaranteed, and current corporations will be less likely to leave as a result.
This study expands the thoughts of the benefits of new tax policies in order to make the United States more competitive in attracting foreign direct investment as well as the potential for retaining corporations within the United States. While the study is quick in response to the new policy, and further studies will be published to show the effects further, this is a good first glimpse. It seems that this tax policy will be able to provide some positives for both the United States government as well as the maintaining of businesses within the United States.
Take a look at the study HERE
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I think the only "real" benefits from this tax policy reside in the corporate tax rate. Lowering the rate to 20% will create a large enough incentive to halt, or at least slow down, the exodus of large business inverting their corporate headquarter abroad. The benefits of slowing the growth of the deficit and long-term expected growth in GDP are simply too small and will have very little effect on our economy as a whole.
ReplyDeleteThe corporate tax rates being cut so much will create a large imbalance in government revenue and expenditures. In order to make this possible, there will have to be plans in place when where to get more money for the government or where to save a large amount of money (however we know how heated the debates is on which programs to cut). There is a reality in which the effects are not that bad. If there is a great influx of business that either are US companies that are using foreign divisions to benefit from lower taxes or companies relocating to the USA then there may be enough new companies to tax that make up for the 15% tax cut. I do not see this happening. There are several reasons that companies choose to offshoring besides lower foreign taxes, such as: cheaper labor, breaking into new markets, having closer distribution centers, finding a way around tariffs and hiring local workers in foreign countries to help a product assimilate to the new country. An example of the power of FDI that is tax irrelevant is BMWs FDI in the USA. The German corporate rate is 15% but BMW still choose to invest in factories in the USA and pay our %35 corporate tax because of all the reasons listed above.
DeleteThe tax cut is not going to make our companies or our corporate landscape more competitive. We know that the tax cut will not help the economy in any great way; trickle down economics has never worked. I success of the Corporate tax cut is about understands how companies use deductions (not every companies is actually paying the 35% rate) and how to curve that at the 20% rate. This new lower rate should stop companies from taking deductions and close loopholes that existed in previous tax codes. The enforcement of a flat 20% tax might stabilize the revenue in a better way then the 35% tax with varying degrees of deductions. An example of this is the company that my fiancé and I own. We are an LLC so we pay a corporate tax rate however last year after deductions (for licenses, advertising, meals and entertainment while traveling for business, a pension, equipment rental, insurance, legal and professional services, office expenses, uniforms, utilities) we paid roughly 23% on taxes. If they enforce the flat rate then losses will be minimized.