Introduction
It could hardly be doubted that the election of Donald Trump has brought numerous changes in the political, social, and economic spheres of life in the United States. It is possible to suggest that one of the driving factors that positively influenced the popularity of the current president and helped him to win the election race were his electoral pledges and promises. Some of them were very controversial, including the pledge to ban people from Muslim countries from traveling to the United States and the promise to build a wall on the border with Mexico.
However, Trump’s rhetorics in terms of economic changes was very promising in the period of the electoral race. However, since Donald Trump was elected, a considerable amount of his pledges remains to be insufficiently implemented, including promises about cutting taxes. This paper focuses primarily on the new tax reform that was passed by Congress and signed by President Trump in December of 2017 because this reform has numerous consequences for the American economy. The paper consists of two parts: the essence of the reform and its perception by various social and political stakeholders will be summarized, and then the reform will be investigated in the context of the theory of optimal taxation. The conclusion will be provided, as well.
Summary of the Reform
It is essential to begin the discussion with the following assumption: the new tax reform legislated by Donald Trump and Republicans in Congress and Senate is one of the most influential events in the political and economic life of the United States regarding its more obvious short-term and projected long-term effects. The title of the article by Siddiqui et al. published in The Guardian, “Senate Approves Most Drastic Changes to US Tax Code in 30 Years,” concisely summarizes the essence of this legislation. According to Siddiqui et al., the $1.5 trillion tax bill approved by the Senate could be considered to be the first major legislative victory of Donald Trump. However, it is essential to understand what consequences does this reform have for the American economy and how principal stakeholders perceive it.
In order to put further discussion in the proper context, it is essential to summarize principal aspects of the reform. According to Siddiqui et al., the primary aspects of the reform is that it “includes permanent tax breaks for corporations and temporary tax cuts for individuals.” The article “Trump Tax Plan: The Key Points from the Final Bill” posted on The Guardian website provides a more detailed overview of the bill. It is stated that the corporate income tax rate is cut to 21% from 35%, and also a 20% deduction is created for pass-through businesses such as partnerships and sole proprietorships (“Trump Tax Plan”). The reform also introduces the new territorial system that ends the current practice of providing taxing profits for all US-based corporations (“Trump Tax Plan”). Moreover, the bill includes new tax brackets for individuals, increasing the standard deduction for individuals and married couples, child tax credit, and personal exemption (“Trump Tax Plan”).
Further, it is possible to notice that Donald Trump was in a significant rush to sign the bill, as it was planned to be done in January, but the president decided to sign it immediately because he got the impression from the media coverage that he did not have enough credit for his promises (Sullivan & Tackett). Thus, it is evident that the president was trying to gain popularity by signing this legislation; however, Siddiqui et al. mention that a recent CNN poll showed that 55% of voters perceived the bill negatively. The proponents of the legislation, namely Republican supporters of Mr. Trump, unsurprisingly consider the bill to be immensely beneficial for the country’s economy, while Democrats argued against it (Siddiqui et al.). According to Democrats, the advantages of the bill’s legislation appear to be applied mostly to corporations, while individual taxpayers will only benefit from it in the short-term (Siddiqui et al.). Thus, the new tax reform appears to be very controversial in terms of its impact on the economy of the United States.
The Reform in the Context of the Theory of Optimal Taxation
Further, it is of high importance to compare the new tax reform to the theory of optimal taxation. According to Gruber, the primary purpose of optimal taxation is to understand “how should a government set its tax rates across a set of commodities to minimize the deadweight loss of the tax system while meeting its budgetary requirement” (601). Thus, it is essential to identify which aspects of the new tax reform are consistent with the theory and which are not.
Gruber mentions that one of the economic benchmarks for the estimation of taxes and income is the Haig-Simons comprehensive income definition (636). According to it, there are two principal aspects: the individual’s “ability to pay taxes” that derives from his or her “potential annual consumption” (Gruber 636). However, it is also suggested that there are two obstacles in implementing the Haig-Simons’ approach:
- it is difficult to define the personal ability to consume and pay, and
- dealing with expenditures that are associated with earning a living is significantly complicated (Gruber 637).
When comparing the new tax reform to the premises of the Haig-Simons principle and the theory of optimal taxation, it is possible to observe that some of the bill’s aspects are consistent with these frameworks. The decision to employ lowered tax brackets for individuals represents the understanding of the necessity to lower the tax burden from the majority of middle-class citizens (Barro & Furman 6). However, the overall effect of the Trump’s tax reform appears to be controversial to the theory of optimal taxation since the primary effect of the bill is the immense decrease of the tax burden for a large corporation, which is consistent with the principle of the same level of post-tax income (Gruber 608). Also, as it is stated by Rosenbaum, the tax reform poses a considerable threat to social safety net programs (14). Therefore, it should be stated that the new tax reform does not comply with the principles of optimal taxation in general.
Conclusion
Summarizing the findings of this research paper, the significance of the bill legislated by Donald Trump could not be overlooked. It is a highly important event for the United States economy and a social life that will have numerous consequences. As it was identified, Trump was aiming to win popularity with the legislation of the bill, but the majority of the American population and numerous politicians stated that this reform would only benefit the large corporations. Also, this paper compared the reform to the principles of the optimal tax theory, and it is found out that the bill is largely inconsistent with the theory. In conclusion, it is possible to suggest that the long-term effect of the reform will be considered negative.
Works Cited
Barro, Robert J., and Jason Furman. “Macroeconomic Effects of the 2017 Tax Reform.” Brookings. Web.
Gruber, Jonathan. Public Finance and Public Policy. 4th ed., Worth Publishers, 2013.
Rosenbaum, Sara. “Now Welfare Reform, Of Course.” The Milbank Quarterly, vol. 96, no. 1, 2018, pp. 13-16.
Siddiqui, Sabrina, et al. “Senate Approves Most Drastic Changes to US Tax Code in 30 Years.” The Guardian. 2017. Web.
Sullivan, Eileen, and Michael Tackett. “In Signing Sweeping Tax Bill, Trump Questions Whether He Is Getting Enough Credit.” The New York Times. 2017. Web.
“Trump Tax Plan: The Key Points from the Final Bill.” The Guardian. 2017. Web.