Donald Trump’s December tax cut is the first major American tax reform legislation since 1986 and is also Donald Trump’s first major success in passing a legislation that he had championed. The new Jobs and Tax Cuts Act reduced corporate and income taxes with the stated goal of stimulating the American economy and improving the country’s economic competitiveness. Despite cutting taxes being one of the biggest hallmarks of the Republican party, polls suggest that the tax plan does not enjoy widespread support among the American public. The passing of Trump’s tax legislation also hints at political problems that the legislation will probably lead to in the future, whether it is furthering the polarization between America’s political parties, or further stimulating populism and popular resentment against the “establishment” that had got Trump elected.
President Trump’s tax plan mimicked previous Republican tax cuts since the time of Ronald Reagan, involving cutting taxes across the board and appeal to supply-side economics for justification. The across-the-board cut in taxes are, theoretically, meant to stimulate economic growth by giving people more disposable income and incentivize corporate investment that will improve productivity over the long run. Whether economics actually operates that way has been disputed by both some economists and social activists, but supply-side economics has been the undisputed leading school since the inflation crises of the 1970s and it continues to enjoy widespread support among policymakers.
The Trump Tax Cuts and Jobs Act is called the most extensive tax reform in 30 years for good reason. A number of changes set Trump’s tax cut apart from previous tax cuts such as those enacted by George W. Bush in 2001. A major reform of the U.S. tax code is the shift towards a “territorial” corporate tax system. Mirroring the move from GNP to GDP, corporate taxation is changed so only profits made by corporations inside the United States will be taxed under the new tax code. The tax reform also caps deductions for state income taxes that previously could be deducted from the taxable income for the federal income tax at $10,000, as well as giving $10,000 in tax credit for enrollment in private schools. Also somewhat unrelated to the tax code, the reform also removes the mandatory requirement for Americans to enroll in “Obamacare.”
While taxes will be cut across the width and breadth of the spectrum, the largest cuts are given to the richest tax brackets and to corporations. The tax reform also raised the level of deductibles for American taxpayers, which is the income taxpayers can earn before they have to pay taxes. The richest income bracket was moved to earning $600,000+ from $480,000 and their income tax rate fell from 39.4% to 37%. While many of the lower income brackets also received income tax cuts as high as 4%, their absolute lower income figures and the fact that changes in after-tax income are not equivalent to the percentage change in the tax rate means that relatively speaking, the benefits for lower-income households are smaller than for the higher-income ones.
Corporate taxes also fell. General corporate taxes have been decreased from a variable rate between 35% and 15%, the new corporate tax is fixed at 21%. Furthermore, perhaps as a sign of self-serving nature of the administration, property development corporations and “pass-through businesses,” which are unincorporated businesses where company and owner profits are synonymous with each other, get further benefits. Property developers receive a special 20% tax rate. “Pass-through businesses” also get to receive 20% deductions for their profits. When it just so happens that the President’s estate is both a real property development firm and a “pass-through business,” one has to wonder the reason behind these regulations.
Whether or not Trump’s tax cuts will be effective in creating growth over the long term is up for debate, but the political ramifications of Trump’s tax plan are troubling. First, Trump’s tax plan was passed entirely based on partisan votes. No Democrat supported Trump’s tax bill, while the vast majority of the Republicans supported the bill with the exception of few representatives from more “liberal” leaning states such as California and New York. The way votes were cast indicate a dangerous level of polarization in American politics. The Republican choice of unilaterally forging ahead with the bill without making compromises and attempting to bring some Democrats on board to give at least some pretense of bi-partisanship will only hinder any future cooperation between the two parties. Casting votes exclusively along partisan lines without evaluating the merits and drawbacks of the legislation proposed will cause further deadlocks that the American Congress is already known for. Furthermore, opposition for the sake of opposition would mean that the otherwise beneficial bills to the United States and its people will be opposed purely based on partisan lines. Such level of polarization undermines democracy and obstructs the passage of some much-needed reforms in a democratic society.
A second social implication is the furthering of the divide between rich and poor Americans and what that may mean for the future of political populism. Polls show that the Tax Cut and Jobs Act has been widely unpopular with the American public before it was forced through. The Harvard CAPS-Harris poll on the subject found that 2/3 of Americans oppose the bill, believing the tax bill to be overly in favour of the wealthy and the large corporations. The public divide is almost as polarizing as the Congressional representatives, with 72% of Republicans supporting the bill and 89% Democrats opposing. Interestingly, when asked whether they approved of individual provisions of the Tax Cuts and Jobs Act, respondents’ support for Trump’s tax reform increased to 51%. Nevertheless, the proposed tax cut for the top income bracket, the large corporations, and lowering the estate tax remain unpopular. Given that Trump was elected into office on a wave of populist revolt against perceived “entrenched interests” in Washington and the “corrupt elites,” Trump’s policies that continue favouring the privileged wealthy is unlikely to reduce the social discontent that had contributed his election victory. The voice of populism is unlikely to be mollified, and the continued Republican tax cuts without considering the distributional impact will likely continue to cause resentment and division among the American public.
Although somewhat rightfully portrayed as a tax bill that overwhelmingly favours the wealthy, the Jobs and Tax Cuts Bill will lower tax bills for most Americans in the near future, however insignificant they may be. The political and social implication of the Trump tax bill, however, does not bode well for stability and order in the United States into the future. The Trump tax reforms continue much in the same vein as the tax reforms since the 1980s, and it is even less bipartisan. The public support for supply-side economics has already seemingly dried up. Rather than “rising tide lift all boats” that had helped previous presidents to pass their tax cuts, there is a clear resentment against the wealthy and the large corporations. Social instability in the United States, as the first year of the Trump administration has demonstrated, can easily spread outwards, causing global uncertainty, instability, and encouraging radical politics in other regions.
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