GOP Tax Plan Passes Senate Test As Republicans Rely On Trickle-Down Economics Again To Spur Growth

After months of debate and discussion, the United States (US) Senate finally passed a big tax reform proposal put forth by the Republicans. Fifty-one voted in favour, 49 against.

The US House of Representatives had earlier passed a similar – but not the same – version of tax reform. This creates hurdles of its own as members from both the Senate and the House will have to iron out their differences and reach a consensus on one version. This will take time, and more give-and-take will ensue. However, the legislators on the right side of the political spectrum expect to send a tax overhaul bill to US President Donald Trump’s desk for his signature by the end of this year. Alternatively, if the White House can convince House Republican members, they can simply stamp the Senate version and save a lot of time and effort. But this is easier said than done.

The tax bill passed by the Senate is a once-in-a-generation opportunity for the Grand Old Party (GOP) with a Republican resident in the White House and a majority for the party in both Houses of Congress as well. No wonder, this is the most comprehensive tax reform being attempted since Ronald Reagan’s tax cuts in the 1980s – more than three decades ago.

The new tax plan proposes to cut top corporate tax rate drastically from 35 per cent to 20 per cent. Those in favour of it reason that the tax now is too high, which is indeed the case given that the average corporate tax rate in the European Union is less than 20 per cent; even in G7 countries, it is 30 per cent. Many argue that after accounting for deductions, it is somewhere near 18 per cent, but if effective tax rates that firms pay is calculated in other countries, the US still stands at the very top end of the spectrum.

Conservatives believe that the slashing of tax on businesses will spur investment, growth, jobs and wages, and will also discourage companies to move their businesses out of the US to low-tax havens overseas.

Another big proposal in the tax reform is to encourage businesses to bring back profits they have parked outside, into the US by offering much lower tax rates. This amount is estimated to be about $3 trillion. The US entities with operations abroad and earning income there will also be taxed less or, in some cases, won’t be taxed at all.

Businesses which are not corporations and hence don’t pay corporate tax, are referred to as “pass through” entities in the US as their income is passed on to the owners and taxed at individual income tax rates. Deductions for these will be increased from 17 per cent to 23 per cent.

On the individual income tax front, the Senate has kept the total number of tax slabs unchanged at seven, though the version passed by the House had reduced the number of slabs to four.

Another major decision in the plan is ending federal deduction for state and local taxes. Until now, people could deduct the income and property taxes they paid at the state and local levels while filing their federal tax return. This was considered by the conservatives as a subsidy to ‘big government’ champions like California, New York, New Jersey, Connecticut and other mostly blue (Democratic) states. Now, if these states want to raise taxes to finance more welfare programmes, they will have to tax their citizens more, who would not be able to claim any deductions from the federal government.

Though the reform is being branded as a boon for the middle class, rate cuts will benefit households across income groups. Wealthy individuals will obviously benefit more as they are already taxed very heavily, and the impact of a slashing of rates will be skewed in their favour. Families with children stand to benefit as child tax credit has been doubled from $1,000 to $2,000. The standard deduction has also been almost doubled to $24,000 for couples and $12,000 for individuals. However, personal exemption, on account of which families currently save over $4,000 in deductions, has been eliminated.

Liberal commentators argue that the tax proposal passed by the Senate will add over $1 trillion to federal debt in the next decade. However, conservatives reason that this will be more than compensated by the extra growth that will occur due to tax cuts and other reforms in the plan.

The new plan also does away with individual mandate under Obamacare, and Republicans hope this will save money for the federal government. Under the individual mandate, it was necessary for individuals to take insurance. Now, as many as 13 million more Americans may go uninsured in the absence of a push from the government. Though this will definitely help save on some welfare money for Washington, one is not sure if it is worth the cost.

The most interesting aspect of the GOP Senate and House tax plans is the 1.4 per cent tax on the country’s richest private universities with hundreds of millions of dollars in endowments. While the House plan mandated that universities with assets worth $250,000 per student be taxed, the Senate plan raised the cap to $500,000. This means that as many as the top 30 universities, mostly ivy league colleges, will be paying substantial tax on their endowments.

Overall, the Republican tax plan looks a winner in the short term, set to benefit lakhs of households and individuals across the income spectrum. However, the debate over whether tax cuts will spur growth, investment, jobs and wages is far from settled. The jury is still out on ‘trickle-down’ economics.