Will Trumps tax policy be implemented?

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Kim Asger Olsen

Kim Asger Olsen

Partner

Much has been said about the reasons for the US Republican’s inability to make a ”repeal and replace” of Obama’s signature health legislation. In brief, the Republican’s had not made one workable proposal that would NOT cost 20+ million US citizens health care, President Trump had no idea of his own and the Republican Party itself is split between several factions.

Interesting to see if Trump and the Republicans can now pass legislation implementing next of Trump’s major policy initiatives. The beginning does not look good.

The nine-page proposal from the White House is a typical piece of “woodoo” economics. It means that the economic thinking behind the proposal flies in the face of all coherent economic theory. In this case it also contains arguments that have been proved wrong several times through real-life experiments..

Despite administration assurances to the opposite, Tax Policy Center, a bipartisan group of tax experts quickly pointed out that about 80% of the tax cuts would benefit the top one per cent among tax payers. Almost 100 per cent would profit tax payers above the median income.

On the other hand, below median tax payers would end up paying more, as the combination of fewer tax brackets and the removal of a significant number of tax breaks would combine and mean that most tax payers would pay more.

Oh, and Mr Trump himself would profit from handsome tax savings of 750 m USD over 10 years, particularly since most of his companies are counted as “small companies” profiting most from the corporate tax cuts.

Finally, the effect on the budget finances would be a huge deficit over the next 10 years.

Reagan believed that tax cuts for the rich would boost economic growth and create enough additional tax revenue that the net effect on the budget would be zero.

George W Bush believed the same. In both cases the tax cuts did indeed cause a boost to economic growth – because the result was a ballooning budget deficit.

In both cases it took a Democratic president and 8 years to clean up the mess.

If Trump,s tax reform is enacted along the lines presented by the White House, all signs are that the same will happen: the top one per cent will get the lion’s share of the tax cuts. Economic growth will increase because of the fiscal deficit. And somebody else will be left to clean up.

At this point the unruly right wing of the Republicans moves to centre stage. Many of them are so-called fiscal conservatives and believe in balanced federal budgets no matter what.  Several members of Congress have already stated that they will not vote for any proposal that leads to an increase in the Federal budget deficit. Democrats will not vote for any proposal that profits the top one percent.

Trump may quickly find himself in a situation where he will again be a couple of votes short to pass legislation.

It will lead to a storm of tweets from Trump. And the financial market will simply notice that the president is unable to get his policies passed in congress. Another of the policies contained in the expected “Trump Bump” will have been defeated.

Once that has happened, let us see how much of the (otherwise quite reasonable) infrastructure plans will survive.