Yahoo Finance 6 things we'll regret about the Trump tax cuts
Critics of the tax overhaul President Trump signed at the end of 2017 think it’s a disaster.
It’s not. The Trump tax plan lowers the U.S. corporate tax rate from 35% to 21%, putting it in line with other developed nations that have been cutting their own business rates for years. Many economists have been calling for such a move for a long time.
The Trump plan will also modestly lower taxes on millions of middle-class families, giving them a few more bucks to spend. Even economists who don’t like the plan think it will boost economic growth a bit in 2018 and 2019.
The problem is that Republicans kicked many problems down the road instead of addressing them as part of the biggest tax overhaul since the 1980s. They may also have created new problems by passing massive tax cuts without coming up with new revenue to offset the cost. Here are 6 things we’ll learn to hate about the Trump tax cuts:
1. Worsening income inequality. Tax cuts for the wealthy will be much larger than tax cuts for lower-income workers, in both dollar and percentage terms. Yes, supply-siders: it’s true that the wealthy pay more taxes in the first place, so they should save more when tax rates decline. But their tax payments will also drop by more in percentage terms than lower- or middle-income taxpayers, which will put even more money in the pockets of those who need it least. The wealthy will also benefit most from cuts in the corporate tax, which will inflate stock prices and returns for those lucky enough to own stocks.
Some income inequality is essential, because it creates powerful rewards for working hard and getting ahead. But wealth is increasingly loaded at the top of the income chain, while the middle is hollowing out. Smart policy would push income inequality back toward historical norms. The Trump tax cuts will have the opposite effect, making the rich richer still, and the rest more resentful. That will have ugly consequences.
2. More tax games. Many private business owners will get a new break that lets them deduct 20% of their income, effectively lowering their tax bill well below what they’d pay if their income were taxed as regular wages. So more people are likely to change their reporting status, stretching the definition of what a business really is. This comes as funding and staffing at the IRS are both down, due to hostility toward the agency from Congressional Republicans who fund it. The inevitable outcome seems to be a surge in tax cheating and a growing sense among honest taxpayers that the system is rigged in favor of cheaters. True tax reform would make the system more fair. But it is now arguably less fair.
3. New perverse incentives. Lower taxes on profits earned in the United States are supposed to lure more businesses here, and create new jobs. That could happen. But one quirk of the bill might do the opposite: Give companies a stronger incentive to keep profits overseas. Some economists think the law will torpedo state and local investment in infrastructure, when in fact we need the opposite. It could also generate new pressure to cut spending on Medicare, Medicaid and Social Security, something voters clearly don’t favor. There could be many other trap doors in the law, which received little public scrutiny before Republicans passed it and Trump signed it.
4. Tribal warfare between various levels of government. High-tax states will suffer from the new $10,000 cap on state and local tax deductions, a provision Republicans knew would disproportionately hit Democratic-leaning states. While Republicans may be gloating, Democrats are plotting revenge, with some states seeking creative ways to deal with the change, such as this doozy: allowing state and local tax payments to count as charitable deductions that are fully deductible. It’s an absurd situation when state and local governments are battling the feds like this. If Democrats win control of Washington in 2020, expect a big push to even the score with Republicans.
5. The fiscal cliff of 2025. The business tax cuts are permanent. The tax cuts for individuals expire in 2025. Congress left that problem unresolved because it would have required a smidgen of fiscal discipline to deal with it now. So future lawmakers get to deal with it instead. You’ll probably know what your 2026 tax rates will be sometime around December 22, 2025. Plan carefully.
6. All that extra debt. The tax cuts will add $1.5 trillion to the national debt during the next 10 years, which might matter some day. During the next recession, for instance, there will be pressure to expand unemployment benefits and enact other traditional types of fiscal stimulus, which gets harder to do the bigger the national debt is. If there’s a real fiscal crisis, Washington can always enact a nationwide value-added tax, like most countries in Europe have. That would raise prices, of course, and might cause or exacerbate a recession. But that’s in the future. So who cares.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman
