An Update on Tax Reform

An Update on Tax Reform

Several weeks ago we started talking about Trump’s administration’s efforts to pass a massive piece of legislation: tax reform. Changing the tax system in the United States was one of the cornerstones of Trump’s presidential campaign, yet his administration consistently failed to find support for all of its other similarly important endeavors – repealing Obamacare and replacing it with a new health system, for example. We predicted then that tax reform will face considerable challenges and would stall, rather than encourage, the US economy’s growth.

This has more or less turned out to be true. The dollar fell to three-week lows just recently. While this doesn’t sound like much, the fact that the dollar was unable to overtake major currencies despite stellar economic reports is meaningful in itself. It stands to show that political uncertainty beats actual performance in investors’ minds.

On Thursday, however, Trump’s people finally made progress: their tax bill passed a Republican house vote. Nevertheless, this does not mean the tax reform plan has been finalized and approved. The Senate Finance Committee, for instance, is working on their own plan to reform the tax system. The final product, it seems, would have to be some kind of amalgamation, a compromise between the existing proposals, which in itself is a difficult task. Even if this type of bill is eventually crafted, it might still fail to gather enough support to pass into effect. Nevertheless, we thought it might be useful to take a look at exactly what the Republicans agreed upon yesterday.

In a revision of their initial suggestion of a new set of seven different tax groups, now the specific incomes corresponding to each bracket have been added, with the lowest income individuals and families (below $45,000/$90,000, respectively) paying a 12% tax, while people on the other end of the income spectrum (over $500,000/$1 million) will be paying 39.6%. Another clause retained from the initial proposal is that the income that’s not subjected to taxes is increased twice as much, i.e. taxes will be calculated on a smaller fraction of one’s income. Generally speaking, these are some pretty major tax cuts.

Why is this tax reform facing so much opposition, then? Surely having to pay less taxes sounds like a great idea to most, until the true cost of tax cuts becomes evident. Taxes are the government’s way of collecting money to spend on other things like education, healthcare, the military, national security, development, etc. Fewer taxes collected means less money to spend on those things.

Based on research by the Tax Policy Center, this kind of restructuring of the tax system will prove most beneficial to the richest Americans and businesses, while middle-class families would end up paying 10% more next year, despite the tax cuts, and then 30% more by 2027.

Another major drawback of the tax reform bill is that it would additionally increase the amount of debt the United States has, creating issues and a possible economic crisis for a future administration to solve.

A law like that is not likely to gain the approval of Democrats in the Senate, which is why tensions will continue in the United States until this issue is settled.

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