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Would Donald Trump’s tax plan really help ordinary working Americans and boost US growth?

Ben Chu
Economics Editor
Monday 04 December 2017 17:57 GMT

“Massive tax cuts for working families across America,” was how Donald Trump described the tax bill, which passed the Senate on Saturday, in the first legislative success of his Presidency.

Trump also approvingly re-tweeted a group of economists at the weekend who claimed that: “The enactment of a comprehensive overhaul - complete with a lower corporate tax rate - will ignite our economy with levels of growth not seen in generations.”

But are these claims true? Will this tax package really benefit ordinary working American families?

And will it boost US growth?

  1. What is this tax reform package?

    The Senate’s bill lowers the top individual income tax rate from 39.6 per cent to 38.5 per cent and slashes the rates for most lower income tax brackets too.

    Other major changes are a doubling in the exemption of the US version of inheritance tax and increasing access to a child tax credit.

    For firms, the bill cuts the headline US corporation tax from 35 per cent to 20 per cent.

    There's also a tax cut for businesses structured as "pass through" entities, which means their income "passes through" to their owners and is taxed at personal income tax rates. The top tax rate on income earned from these entities is due to fall from 39.6 per cent to 15 per cent.

  2. Would it help working Americans?

    The Tax Policy Centre, made up of independent experts, has produced a distributional analysis of the impact of the Senate’s tax bill.

    This shows that the bill would reduce taxes on average for most Americans between 2019 and 2025.

    But by far the biggest beneficiaries of the tax cuts by over the next decade would be the top 1 per cent and the top 0.1 per cent of American households.

    And by 2027 taxes would rise for the lowest income groups.

    The bill also repeals the Obama administration requirement that all Americans obtain health insurance, which is likely to mean that around 13 million fewer Americans, most of them less well-off, have health coverage by 2027, according to the non-partisan Congressional Budget Office.

    The tax cut for "pass through" companies is also likely to benefit wealthy individuals most of all. One major user of these structures is Donald Trump himself.

  3. What about the impact on the US economy?

    A group of economists wrote an open letter in the Wall Street Journal last month supporting the President’s tax cutting efforts and suggesting that the package could boost the US economy by 3 to 4 per cent in the long term.

    A larger group of economists (137 in all) wrote an open letter making similar assertions.

    But such claims has been fiercely contested by other economists, who have pointed to the lack of supporting evidence.

    A recent survey of a distinguished panel of some of the leading lights of the economics profession suggests virtually none expect any kind of long-term positive growth effect from the tax cuts.

    And the WSJ group have actually seemed to row back on their extravagant growth-boosting prognosis after being challenged.

  4. What about the US deficit?

    The Treasury Secretary Steven Mnuchin, a former Goldman Sachs banker and Hollywood financier, claimed in September that the tax cutting legislation would raise US GDP so much that it would not increase the country's deficit (the gap between tax revenues and public spending) over the long term. Indeed, he even claimed it would ultimately reduce the US national debt.

    But this is flatly contradicted by expert independent analysis. The Congressional tax watchdog, the Joint Committee on Taxation, estimated at the end of last month that on a “static” basis, so excluding any growth effects, the cost of this tax bill would be $1.4 trillion (£1 trillion) in lost revenues over 10 years.

    The JCT estimates that the package would raise the level of GDP by only 0.8 per cent over 10 years relative to otherwise.

    This implies a net long-term hit to the public finances of around $1 trillion.

    Presuming other US taxes are not going to be hiked to compensate, this hole would need to be filled by either additional state borrowing or lower public spending.

    Given one of the largest items of US public spending is healthcare subsidies for the poor, it is the less well-off Americans who stand to lose most from the latter.

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