All Financial Wisdom
Trump’s Tax Reform
Last week, the Trump administration unveiled its tax reform plan. Lowering taxes was one of the electoral promises of his first 100 days in the office. Although the tax reform has been presented, it has yet to be finalized and discussed in Congress. The presidency of Donald Trump has been one of the most striking in history, and his fiscal proposal is not far behind.
The tax proposal
If we had to define the proposal of the Trump administration with two words it would be: Lowering Taxes. Taxes are lowered on people and also on businesses.
The first measure is the reduction of the Corporate Tax rate, equivalent to corporation tax. This would stay at 15%, compared to the 20% proposed by some voices of his administration. To give us an idea, in Ireland whose corporate tax is quite low, it is 12.5% and the previous rate was 35%. According to Trump, this will encourage investment in US soil and will also increase the repatriation of funds that makes US companies keep large sums overseas.
Regarding the new personal income tax plan, there are also simplifications. It goes from seven to three tax brackets. These are 10, 25, and 35%. A little different from what he proposed in his election campaign, where he put the highest tax rate at 33% and the lowest at 12%. In addition, the minimum exemption for a married couple is $24,000 and deductions are introduced for those with children requiring childcare services. The reform would also lower taxes on the richest, whose current maximum rate is 39.5%. In addition eliminates the “Alternative Minimum Tax.”
One exception to this is that Donald Trump intends to create a new tax that they have defined as Border Adjusted Tax. With this, his administration will try to compensate the cut to the corporate taxes. They want to put a 20% tax on sales of imported goods (with exemption to exports). At the moment there is no news on whether this will be possible according to the rules of the World Trade Organization and, of course, we have not been given much details on this new tax.
Is this tax reform sustainable and possible?
The tax proposal has been defined by Bloomberg columnist David Shipley as “brave and unmistakable,” like the rest of the Trump administration proposals. And it is true, although a simplification of the sections is not inadequate, if much remains to be defined in this tax proposal. However, I suspect that the taxation of the world’s leading economic power can not be so easily changed.
The tax cut can also increase the public deficit, currently at 3.2%. Perhaps the worst thing about Obama’s legacy has been the heavy debt as we discussed in the balance of his eight-year presidency.
If Trump wants his fiscal proposal to go ahead without increasing the deficit, it will be necessary for the economy to grow at a much higher rate than its current 2%. It will be necessary for the economy to grow by 3% in order to maintain it. The state’s current indebtedness is much higher than in the Reagan era (which also lowered taxes).
The Trump administration has a new opportunity to demonstrate that it is capable of proposing a plan, negotiating it, and getting enough votes in the legislative bodies to get it approved and implemented, unlike healthcare. Donald Trump said after his 100 days at the White House that the work is more complicated than he expected, and tax reform is never easy to achieve. Will Donald Trump be able to pull off his promised reform ahead this time?