What grabs you about the Trump tax plan is how similar the corporate rate is to Ted Cruz’s business tax rates proposed in the primary. Alos, how similar his individual tax plan is to Marco Rubio’s while being family friendly.
The business tax goes from 35% to 15%. This switches to a territorial system. It encourages United States Corporations to stay here. It also ditches the border adjustment taxes.
The individual tax rates are reduced to three brackets from the current seven. These are 10%, 25% and 35%. Additionally, there will be more generous family deductions as well as expanding child care benefits. This is similar to plans proposed by Marco Rubio. Rubio’s plan includes not just reducing the rates but increasing deductions. This allows many middle class families to have more money in their pockets.
Many deductions including state and local income taxes, are eliminated. While others like mortgage interest will stay. The former deduction benefits high taxed blue states. There will be a fight over this. The blue state politicians have been able to increase taxes, knowing that for many of their higher income voters, they could use this deduction to offset the higher state taxes.
For individuals, marginal tax rates are not significantly reduced at the upper end. But, the lower tax rates combined with higher deductions for family will lower the tax burden on lower income families. The corporate tax reduction is significantly lower as it is more than half of the present rate. The United States goes from among the highest taxed developed nation to one of the lowest.
This corporate rate encourages money held overseas to come back home. It will also reduce the urge for companies to move overseas. Lowering the corporate rate should not be controversial since even Obama proposed it in 2013.
The lower tax rates will increase government revenues. They will encourage economic growth and open up more income for taxation. The other benefit is that as companies improve their bottom line and can safely plan for the future, their workers will get raises and see their incomes increase.
Lower corporate tax rates allow American businesses to compete successfully internationally and give them a reason to manufacture at home. When businesses invest their profit and entrepreneurs innovate, this creates jobs and increase opportunities.
Trump tax plan is a good beginning. However, the plan still must be developed since Trump left many details undecided including the levels where the rates take effect.
We can only estimate what growth will occur based on past models. The question is what impact will this have on the deficit. While growth should occur with the tax plan which should reduce the deficit, Congress and Trump still must reduce spending or freeze overall spending to continue deficit reduction.
The Trump tax plan is hardly a radical statement. Much of the reform was already proposed by others. Additionally, even Obama’s own commission on deficit reduction recommended lower tax rates. The Trump plan on the highest rate is higher than even the Obama commission. There is a consensus that our corporate tax rate is too high and Trump’s reform is a step in the right direction.
Tax reform will not relieve Congress and Trump from restraining spending to lower the deficit and national debt. However, tax reform will aid in expanding the economy and increasing tax revenues.