President Trump’s proposed tax reform could be great in the short term for the stock market, useless in helping the US economy and a disaster for future generations of Americans.
It all depends on how unpredictable American taxpayers and corporations will react if they suddenly found themselves with more money in their pockets.
Everyone, of course, wants to pay less tax.
But as an economic policy that’s going to “create robust economic growth” – what the Trump administration suggested Wednesday – is iffy at best. And it will still be iffy even when the White House gets around to filling in all the blanks in the scantily detailed tax reform plan.
Some highlights for individuals: simplify the tax codes; cut the individual tax brackets from seven to three, with the top tax rate at 35 percent (now it’s 39.6 percent); and double the standard deduction, but take away other deductions.
The proposal would also protect deductions for homeowners and those who give to charities. But it would take away the ability to deduct from your federal taxes those taxes paid on the state level.
That means residents of high-tax states like New York, New Jersey and Connecticut will fare a lot worse under Trump’s tax cut than residents of low-tax states like Florida.
For businesses: a lowered tax rate, to 15 percent; a one-time lower tax on trillions of dollars in profits held overseas; and a “territorial tax system” that, the administration says, will level the playing field for American companies competing against foreign companies.
All well and good – except that when asked, Gary Cohn, chief economic adviser to the president, and Steve Mnuchin, Treasury secretary, couldn’t say how the gap this plan would create in revenue collection by the government would be made up to keep US debt levels from soaring.
In fact, reading between the lines and listening closely, it was clear that the Trump administration is counting on economic growth – which it hopes it can return to 3 percent annual levels – to make up for the revenue that the Treasury will be missing on every dollar of profit.
So will the president’s plan to reduce and simplify taxes lead to a more vibrant economy? Maybe, but if it doesn’t, then the plan could turn out to be a disaster for Americans who haven’t even been born yet. Here are the problems.
Nine years ago next month, President George W. Bush started handing out rebate checks to all taxpayers. They were for small amounts – $600 for individuals, $1,200 for couples and $300 for each kid.
Bush’s idea was the same as President Trump’s: Put money in people’s pockets and they will spend it and the knock-on effect will rain down increased growth on the US economy and spark additional tax revenue.
Economists call it the multiplier effect. Americans had other ideas: They didn’t spend the cash.
In fact, the US economy still moved on to its biggest crisis in decades.
Who’s to say that Americans today will spend the money they get from a tax break? In fact, the prudent thing for most families would be to put any money from tax cuts Trump may give them in the bank. And since Americans have been suffering economic petrification since the Great Recession, that’s precisely what many will do.
Or Americans who are deep in debt – and there are many millions – might use Trump’s tax cuts to pay for the things they already bought on credit. That might make them more likely to buy things sometime in the future, but it will do nothing to help the economy immediately.
And the economy does need help. This Friday, the Commerce Department will announce the nation’s gross domestic product for the first quarter of 2017 and it won’t be pretty. If expert estimates are correct, the economy could have been growing by less than a 1 percent annual rate in the first three months of the Trump administration.
The same could be true of corporations getting tax-cut cash.
Companies could decide to expand their businesses using Trump’s money – but just as easily they could decide to use the money to purchase their own company’s stock. After all, many executives work under a bonus system pegged to earnings per share.
The Trump administration has no way to force either individuals or corporations to spend the tax-cut cash.
And unless the economy grows substantially, the US Treasury will not receive added revenue to replace the money Trump will be giving away.
That means the nation’s debt, which is now just short of a mind-boggling $20 trillion, will increase even more than it already would have. And Americans who haven’t even enjoyed their first pacifier yet will be choking on our fiscal decisions. The White House released too few details to give its plan a fair evaluation even though Cohn said, “We’ve been working on this for a long time.” Maybe President Trump will get lucky. Let’s hope so because so many things could go wrong.