President Trump might be onto something with his proposed tax-cut plan. The plan appeals on several levels: simplification of the tax code, elimination of the tax pass through, and reduction of the corporate tax rate to 15 percent. Presumably, this plan would reduce the tax burden on American taxpayers, bring back trillions of dollars back to the U.S. American business park overseas, bring back companies and jobs to American, and restore GDP growth 3 to 4 percent. Elimination of the estate (death) tax will guarantee the intact transfer of inheritance. More specifically, among other things, the tax plan has as goals grow the economy, simplify the individual tax code and lower the business tax rate. In terms of individual Americans, the tax reform will reduce the current seven tax brackets to three: 10 percent, 25 percent and 35 percent, it will double the standard deduction, repeal the Alternative Minimum Tax (AMT), repeal the death tax (estate tax), and repeal the 3.8 percent investment tax. Business gets a break, too as the business tax rate will be 15 percent. (Reference MarketWatch) In legislating AMT, Congress intended that the wealthy pay some tax that they were not paying because of deductions, exemptions, and tax credits under the regular income tax law. It isn't indexed to inflation, therefore over time middle and upper income taxpayers are burdened by AMT. One wouldn't quarrel too much with its repeal. (See Forbes) But the death tax is quite another issue because its exclusion for decedents in 2017 is $5,490,000. There is no clear reason for repealing the estate tax that only a miniscule number of Americans pay. A quote from the Tax Policy Center (TPC) highlights why: "For decedents in 2017 (with an exemption of $5.49 million), the Tax Policy Center estimates there will be only about 11,000 estate tax returns filed, of which 5,200 will be taxable. Estate tax liability will total $19.7 billion after credits (table 1). To put the number of estate tax returns filed in perspective, the Population Division of the Bureau of the Census projects that 2.7 million people will die in 2017. Thus, an estate tax return will be filed for only 1 in 243 decedents, and only 1 in 517 will pay any estate tax." Repeal of the estate tax will also represent a loss to the U.S. Treasury of about $20 billion in revenues."
It isn't clear whether the plan was part of an effort to achieve legislative wins within the first 100 days of President Trump's presidency. Aside from the cynicism implicit in that thought, instead concede the tax plan represents making good on a campaign promise with consequential possibilities for making America great again. Given the labyrinthine maze of the current tax code, tax simplification would be an improvement. Repealing the ACA would cut many taxes enacted by former President Obama to pay for the ACA. However, 90 percent of the highest income taxpayers will be the beneficiaries of the tax savings. Low- and middle-income will feel the brunt of the repeal of the ACA as their subsidies will be replaced with tax credits. ABC states: "The bill would cut more than 20 taxes enacted under former president Barack Obama's heath law, saving taxpayers nearly $US600 billion over the next decade. The bulk of the money would go to the wealthiest Americans."
Keynesian economics' justification for tax cuts to grow the economy is known. It argues that when an economy is in the throes of recession (or low economic growth rates), tax cuts would increase consumer disposable income (after tax income) and induce increased consumer spending on consumer goods: computers, TV sets, refrigerators, etc. And business tax cuts will increase spending, too, through more investment. In other words, a sluggishly performing would benefit from tax cuts for consumers and businesses. The adverse effect of these cuts, however, will punch holes in the government budget producing under the circumstances justifiable deficits. Government spending such as transfer payments, social security, Medicare, food stamps would rise. The causal chain from tax cuts to economic growth is easy to understand. Since in a recession output falls, unemployment rises, and government tax receipts fall. On the other hand, in a recession government expenditures will be greater than government revenues. The economy inherited by the current administration was not quite so bad as the one inherited by the previous administration. Interestingly, at 4.5 percent unemployment, the stock market value hovering at over 21000 points on the Dow, and the absence of recessionary winds the offing. In fact, Fed Chairperson Janet Yellen seems poised to continue to relax easy money in anticipation of faster economic growth that might have inflationary expectations. Politicians who push for revamping the tax system or reducing tax rates often allude to President Kennedy and Reagan's tax cuts for evidentiary support.
Will the Trump tax plan produce the same level of tax revenue that the current tax code? Possibly, if it leads to economic growth of 3 or 4 percent, such that tax receives from individuals and business exceed government expenditures--both automatic and discretionary. Ultimately, whether the economy performs better or not, whether the deficit rises or not, and whether the unemployment rate falls or not, do not seem really to matter much. If the wall does not get built, if there is really no major infrastructure investment, as with birtherism and the promise to jail Clinton, supporters of the President will simply forgive and forget while detractors will weep . . . well . . . in their beer. Going forward, the only way to achieve an economic outcome that contains more guns and butter is by enlarging the country's economic possibilities--perhaps through raising productivity with technology advances generally speaking. If the President's tax cut goal is to grow the economy, the asymmetry of the cuts that favor the wealthy with lower propensities to consume will defeat that purpose. Low and middle-income families are likely to spend more of extra income from tax cuts.