Recently, President Trump released a US ta cut plan to reshore US corporate revenues. Some expect it to cause great challenges to manufacturing and capital outflows from China. The realities are more complex.
At the eve of the White House’s 100-day mark in office, the Trump administration released an outline of tax reductions for American companies and households. There is great demand for change. US tax individual income tax system is broken, and while US corporate tax rates are high internationally, US companies have parked more than $1 trillion worth of cash abroad.
Yet, the White House has released no official estimations of the economic impact of the proposed changes. The plan is vague by design and incomplete by intent. The idea is to leave flexibility for wheeling and dealing when talks begin in the Congress.
President Trump’s proposal is not a broad reform package. Nor has the White House released any official estimations of the economic impact of the proposed changes. The plan is vague by design. The idea is to leave flexibility for wheeling and dealing with Congress. Indeed, the administration may ultimately opt for tax cuts, which are easier to implement than a full tax rewrite.
But what would Trump’s plan mean in America and in those emerging economies, such as China, which host an increasing number of US companies?
The Trump Plan
From Roosevelt’s New Deal to Lyndon B. Johnson’s ‘Great Society,’ America sought to achieve the kind of welfare state, which in Europe goes back to Bismarck’s cooperation of the working class in the late 19th century. Until recently, progressive taxation has played a critical role in all advanced economies. But in America, that model that has been under a siege since the Reagan years. Today, US personal income tax rate is one of the lowest among the G20 economies (Figure 1a).
Conceivably, the Trump administration would simplify the number of individual income tax brackets, which currently top out at 39.6 percent, from seven to just three (10%, 25% and 35%). Moreover, it would reduce the tax rate on capital gains, non-corporate business taxes and those in the highest bracket, repeal the alternative minimum tax and the Affordable Care Act (the “Obamacare”) surtax, and the real estate tax. The last one alone, which affects just 5,300 fortunes annually, would cost some $174 billion over a decade, according to the non-partisan Tax Policy Center. Critics expect the total costs of the plan to soar to $5 trillion over a decade.
