IN THE UNITED STATES, 1 January not only brought about the start of a new year, but also the implementation of a new tax plan. Two major changes see corporation tax slashed by 16 per cent as well as a revamp of the income tax system in the biggest reform since the Reagan era. The White House hopes that this plan, costing $1.4tn, will boost the economy by creating jobs and encouraging growth. But how will the Tax Cuts and Jobs Act affect both people and businesses throughout the US?
A good place to start is the tax on corporate profits, which has been reduced from 35 per cent down to 21 per cent in a bid to make the US more attractive to firms looking for a home, while freeing up incumbent firms to invest and expand. The sentiment behind this is well placed but experts are sceptical about the timing of such a reduction. Nobel Prize winning economist Paul Krugman explained that “in the short run, nothing” will happen to wages. Firms would first have to accrue new capital which in turn creates demand for labour, and only then could wages increase. Krugman himself thinks that this process will take around ten years although even then the effect on wages could be “barely visible”.
As one of the most attractive countries for business already and with an unemployment rate that is at a 17-year low, this reduction in corporation tax is perhaps completely unnesessary. But Americans can be safe in the knowledge that when hard times do come, their economy will be a more appealing place for businesses seeking haven after these reductions.
American families, however, will be more focused on the changes to income tax. The first thing you notice about the new system is the simplicity, with seven brackets being distilled down to four, with each bracket seeing a reduction which means that households will have more money in their pockets to spend or to save. With many working-class families struggling, there is no doubt this new tax bill alleviates some of the burden from their shoulders.
It is not all good news, however: The Tax Policy Center, a non-partisan think tank based in Washington DC, has found that it is the richest income bracket that will benefit the most, being made 4.3 per cent better off relative to their income compared with 0.1 per cent for those on the lowest incomes. Although no one was expecting Donald Trump to be the one to eradicate the problem of economic inequality in the US, it is nevertheless a shame that this bill may exacerbate rather than heal the divisions in American society.
Although some people could end up paying more in tax, many people stand to benefit from this tax bill. Things are far from perfect though, and with tax reforms coming around so irregularly there is no doubt that this is an opportunity missed.
Only time will tell how households, firms, and markets will react, but for now the Trump administration will hope that they get a reaction in terms of economic activity. After all, $1.4tn squandered would leave a sizeable hole in the country’s budget.