In the plan, unveiled at the White House last week, Trump proposed cutting to 15%, both the income tax rate paid by public corporations and that paid by “pass-through” businesses, including partnerships.
The tax plan, which was part of Trump’s election promises, includes a cut in taxes on public companies to 15% from 35%.
For average US taxpayers, Trump proposed help by doubling the standard deductions for individuals who do not itemise; simplifying tax returns by reducing the number of tax brackets to three from seven; and providing unspecified tax relief for families with child and dependent care expenses.
The tax plan, however, does not detail cuts in spending that would help keep the budget deficit under control.
Under Trump’s proposals, American companies would move from being the most highly taxed among the Group of 20 (G20) countries to among the lowest. Tax rates would fall below those of neighbouring Mexico and Canada, which Trump has accused of shortchanging the United States in trade deals.
About $2.6tn in profits are reportedly being held tax-exempt abroad by US multinationals under a rule that says they are only taxable if brought into the United States.
If enacted, the repatriation tax holiday is set to result in a one-time surge in government revenue.
The outlined plan appears quite similar to proposals President Trump made during the presidential campaign, analysts say. Many details, such as the tax rate for repatriated foreign earnings, the treatment of capital gains at death, and the application of the business tax rate to ‘pass-through’ businesses have been left to future discussions with the US Congress.
Reports suggest many US companies already pay less than the headline 35% tax rate. Companies in the S&P 500 index are said to have paid an average tax rate of 29.06% for 2016.
Some economics argue that the type of tax cuts being promoted by Trump would likely fuel even larger deficits for a federal government, which is already projected to see its debt steadily rise.
They are also unlikely to generate Trump’s ambitious promised growth rate of 3% a year, roughly double the 1.6% growth achieved in 2016. These two factors are related because the Trump administration is counting on faster economic growth to produce additional tax revenues that could then close the deficit.
But, the problem, they emphasise is that the economy can’t grow quickly enough to cover the likely hole in the deficit.
Also, most economists say it’s unlikely that tax cuts can generate enough gains to prevent the budget deficit – estimated to total $559bn this year – from rising.
The benefits of the tax cuts could also be limited by economic forces beyond the US administration’s immediate control.
In short, major tax cuts might provide an immediate boost to the US economy, but they would likely produce additional debt that dampens future growth in the world’s largest economy.