Trump`s tax reform
How does this new suggested legislation affect the US economy?
This week we chose to return our discussion to the political situation in the United States where we have another major news story: the new tax plan proposed by President Trump’s administration. This story is significant particularly because this is barely the second major piece of legislation that Trump’s office has produced. The first one was the now infamous health care bill which died a slow death in Congress, repeatedly. The failure of the administration then drove investors to doubt the stability of Trump’s mandate, which was a major contributor to the record lows of the American dollar registered up until last week. Can this new bill on taxes have the same impact? Let’s see!
First off, we need to acknowledge how important tax policy was to Trump’s presidential campaign. He had a few key issues that were the highlights of his rhetoric: immigration, repeal Obamacare, and a better tax policy, among a few that stand out the most. His attempts to curb immigration through travel bans have been met with major disapproval, his plans to repeal or replace Obamacare have failed, and now his proposal on tax policy is met with a lot of doubt before it’s even fully-defined. Trump’s previous failures managed to shake the dollar, so it is reasonable to argue that if his tax bill is a fiasco, he might hurt the American currency again.
The plan that Trump’s administration announced on Wednesday can hardly be called anything, according to experts. It contains vague outlines of the administration’s goals while it lacks clear explanations of how they propose to achieve them. The actual work on making this plan more meaningful still lies ahead and may take months, according to CNN. What we know for certain is that the plan will decrease the top income tax from 39.6 to 35%, giving a major advantage to the richest Americans. The proposal would suggests an increase of the ratio of income that is exempt from taxes, which would mean a lower tax for every individual. While this sounds great for people’s personal incomes, it would make a major dent in the budget of the United States, due to trillions of dollars of potential tax revenue not being collected.
Trump’s tax plan doesn’t provide any guidance on how the budget shortage will be compensated under such a policy. It also doesn’t prove that this new tax system won’t place a greater burden on the middle class, which Trump has stated he wants to protect. It very clearly benefits the rich, while it’s murky (at best) in terms of all other income groups in the United States.
The plan also suggests a simplification of the tax system by collapsing the current seven-step policy (where seven different income groups are taxed a different percentage, between 10% and 39.6% for the poorest and richest incomes, respectively). The new system would have just three groups: 12%, 25%, and 35%, but the income brackets for each tax rate are still unknown. It’s also interesting that some corporate taxes are proposed for the 25% rate instead of the 35%, which may cause a lot of tax fraud.
Considering how much information is missing from the proposal, it’s still very difficult to dissect it. However, Republicans themselves do not agree on many of these issues, not to mention that Democrats are not likely to support anything that cuts the taxes of the wealthy, so this piece of legislation is likely to have trouble passing through Congress – if it is ever completed.
Right now there might not be too much to this story as we still need to hear more concrete points about the tax bill. However, it’s worth it to stay tuned and watch out for further instability within the United States. They are already in the spotlight due to tensions with North Korea – any internal disorder would only worsen their economic climate and weaken the dollar.
