5 Ways Trump’s Tax Cuts Could Go Awry

The first 100 days of Trump’s presidency have been unremarkable, to say the least. He has been unable to fulfill on any of his campaign promises. The travel ban is not in place, and neither has the construction of the Wall started. Trump’s reputation is taking a hammering. In these tough times, he has pulled a trick out of his Republican hat. His next objective is to modify the tax code.

At the present moment, Trump believes his tax cuts will work flawlessly. The idea is that Trump will reduce the tax rates from 35% of income to 20% of the income for corporations and wealthy individuals. These high net worth entities will then invest their money creating more employment or buying goods and services that will indirectly create more employment.

Hence, the amount of tax revenue lost by the state will be more than compensated by the boom in the economy caused by this tax cut. It will be like collecting a smaller amount per person but collecting from a much larger number of individuals.

Critics of Trump’s plan already include this in the list of his colossal failures. They believe that the Trump tax plan is going to accomplish nothing except making the rich richer. Hillary called it Trumped up trickle-down economics during the Presidential debates. In this article, we will understand the top 5 reasons why Trump’s tax cuts are unlikely to work.

Reason #1: Competing Tax Cuts

Firstly, America is not the only nation with tax cuts on its agenda. The entire world is reeling under the effect of the financial crisis. Several countries want corporate investments even more badly than America does. They are likely to offer even sweeter deals to try and woo the capitalists to their country. It is also likely that Trump’s favored high net worth entities might save money in America via tax cuts but then send it to countries like China and India for investment to earn better returns! Hence, the tax cuts will not lead to any job growth and incremental tax flows! Either of these two things could severely hinder the success of Trump’s tax plan.

Reason #2: Budget Deficit

The United States already has a massive budget deficit. The federal government has to borrow more than $2 billion per day just to stay afloat. This is after they tax the corporations at 35%. Imagine if Trump cut down the tax rates to 20%, this would almost halve the revenue. The Treasury would have to borrow much more money to stay afloat. Given America’s dangerous economic position this is a gamble. If the state’s tax revenues do increase, the gamble would have paid off. If not, the United States would find itself in even deeper trouble.

Reason #3: Infrastructure Spending

Not only does Trump plan to attack the Treasury’s source of income, but he also intends to double the expenses! Trump’s campaign promises include some very expensive projects. One of them is the Mexican border wall which Trump will have a hard time getting the Mexicans to pay for! Another one would be rebuilding America’s inner cities which are likely to cost over a trillion dollars. Trump’s proposals are likely to put extreme pressure on the treasury to borrow money in the magnitude that America has never seen before. It would not be a wise decision to halve the income and start such mega projects at the same time given the fact that these mega projects will double the expenditure.

Reason #4: China Trade War

Trump’s tax plan starts to seem suicidal when his policy towards China is considered. China is the biggest lender to America as of now. If China started dumping America’s debt, the interest rates would skyrocket. Even if China simply stopped buying treasury bonds, the government would face a crisis. Instead of reducing his reliance on China, Trump’s policies will create a need for extensive borrowing. Extensive borrowing and a trade war with China would bring the economy down to its knees. There are not many lenders willing to lend to the United States apart from China. Trump must decide what deserves his immediate attention and what can wait. Simultaneously pursuing all these policies would half the America’s income and double its expenses while cutting off the credit line!

Reason #5: No Trickle Down

Lastly, what if people decided to invest their money in something where the government does not earn tax revenue. What if people paid down their credit card bills with the tax money left over? The individuals would be better off, but the government would be worse off! Similarly what if companies decided to repurchase their stock from the market instead of opening up new factories! In fact, a lot of companies are likely to do so. Stock repurchase allows increasing earnings per share even in flat markets and hence may be preferred by a lot of executives now. In these cases, the government will lose half of its income and the loss will not be offset by the increased production in the economy.

To sum it up, Donald Trump’s plan is not well thought through. His campaign promises are incompatible with each other. If he did implement all of them in the first 100 days, United States would be moving swiftly towards bankruptcy.


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