Opinion: The ongoing debate of tax reforms after the proposals of Trump administration
On 29 of April Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn released the broad outlines of the Trump administration’s official tax reform proposal causing a hot debate about progressive versus flat tax laws in the economy and which is preferable.
The financial crisis of 2008 led the states to spend huge amounts of finance in order to sustain the financial and banking sectors which were devastated by the crash as the bankrupt of Lehman Brothers show. This ‘’Keynesian Policies’’ for the financial sector create huge public deficits for the states particularly for USA and EU Member States. This development led to the necessity for the governments to find additional funding not by borrowing from the international markets but from the increase of their tax revenues.
In the wake of the crisis the USA government under the Obama administration chooses to increase the federal income tax for the millionaires and the profit tax for the multinational corporations. The income tax up until now has seven brackets with the higher rate to be at 39.6% and the corporate tax is at 35%. The new administration of President Trump wishes to reform the USA tax system and recently on April 26 Treasury Secretary Steve Munchin and National Economic Council Director Gary Cohn released the broad outlines of the Trump administration official tax reform proposal. The basic outlines of the proposals are:
1) Lower individuals tax rate the higher marginal will fall from the current 39.6% to 35%. The brackets will reduce from seven to three with rates at: 35%, 25% and 10%. But there is no mention of what income levels these rates would apply to.
2) Provide child and dependent care tax breaks but these were not specified
3) Double the standard personal tax deductions from 12,700 US dollars to 25,400 US dollars.
4) Lower the corporate tax from the federal 35% to 15%
5) Set the pass-through rate for business owners at 15%, replacing rules that tax business owners at the personal income rate.
6) Allow a one-time repatriation of corporate profits at a reduced rate. U.S. companies currently hold around $2.5 trillion overseas. The one-time rate was not specified
7) Eliminate the estate tax, commonly referred to by anti-tax conservatives as the “death tax’’
8) Repeal the 3.8% tax on the net investment income of individuals, estates and trusts, when such income exceeds statutory thresholds. The tax went into effect in 2013 as part of the Affordable Care Act, or Obamacare.
9) Repeal the alternative minimum tax, a device that reduces tax avoidance
10) Eliminate tax breaks that benefit the wealthy and special interests; these were not specified.
These are the ten basic measures that the Trump administration wishes to implement in the tax policy of the USA and from their announcement the debate of what type of tax reforms is needed has reemerged. We could argue that two major theories of tax reform contest in this informal debate: if the tax system should be more progressive or if the tax system will impose fewer amounts of taxes to the rich individuals and the multinational giants.
Progressive tax systems generally consider the system that the tax increases with the increase of income. The term “progressive” refers to the way the tax rate progresses from low to high. The tax policies which follow the progressive system has a policy target to reduce the tax incidence of people with a lower ability to pay, as such taxes shift the incidence increasingly to those with a higher ability-to-pay. The advantages of a progressive tax system are:
1) Reduce the tax burdens on people who can least afford to pay them
2) Leave more money in the pockets of low-wage earners, who are likely to spend all of their money and stimulate the economy.
3) Have the ability to collect more taxes than flat taxes or regressive taxes, as tax rates are indexed to increase as income climbs.
4) Allow the people with the greatest amount of resources to fund a greater portion of the services all people and businesses rely on, such as roads, first responders and snow removal.
The critics of the progressive tax system based their arguments that the progressive taxes consider them to be discriminatory against wealthy people or high-income earners. Particularly in the USA, conservatives and neo-liberals believe that the progressive tax is effectively a means of income redistribution.
The conservatives and neo-liberals propose a different tax system were the higher incomes and the profits of multinationals corporations wouldn’t be burden with a high proportional tax rate as their income (or profits) rise. They usually advocate for a flat tax. A flat tax is a tax which is always a certain percentage of the income or profits and is not changed when income and profits rise, so it remains stable.
There is also a minority which proposes a regressive tax where the relative tax rate or burden decreases as an individual’s ability to pay increases. The economists which propose a more favorable tax system for high earners and big corporations based there assumptions that people with higher income will spend more boosting consumption or will deposit their income and thus boosting investments. The argument against this is that the people with low or middle income have a larger propensity to consume compare with high income people and that recent tax laws that reduce taxation for the rich and the corporations didn’t led to an increase in investments and employment as the Reagan administration tax reform of 1983 and the George Bush Junior administration during its first term in office.
The new tax reform which the Trump administration propose looks like it tries to combine a reduced flat tax for the corporations and high income people with a reduce tax burden for the middle class, as we already observe the proposals by the US government lowering to 15% the firms tax and increasing tax deductions from 12,700 to 25,400 US dollars.
The Nobel prize winner economist Joseph Stiglitz in his recent article on Guardian said that lowering taxes for the rich and deregulation doesn’t help the economy to growth. More specifically he wrote that the solution is always the same: lower taxes and deregulation, to “incentivize” investors and “free up” the economy. Donald Trump is counting on this package to make America great again. It won’t, because it never has. When Ronald Reagan tried it in the 1980s, he claimed that tax revenues would rise. Instead, growth slowed, tax revenues fell, and workers suffered. The big winners in relative terms were corporations and the rich, who benefited from dramatically reduced tax rates.’’
Stiglitz based his position on the past results that similar reforms have in the US economy and with some bitterness comments that the same solution won’t work again because it never actually work but rather was the cause for some of the most severe problems the US economy has such as income inequality, low productivity, increasing part-time jobs instead of full-time, low income growth for the workers in industry etc.
Stiglitz also commented that the problem the current administration will face in order to implement its tax program through the vote of the Senate will be the need for tax reform revenue neutral. This requirement means that average corporate-tax revenue must remain the same, which implies that there will be winners and losers: some will pay less than they do now, and others will pay more.
We could also argue that other capitalistic economies like Sweden and Denmark have progressive tax rates in order to sustain a welfare state and their economic performance is admirable compare with other states that follow a flat (or regressive) tax policy.