News analysis

Tax cuts will boost growth, but for whom?

Analysts say US economy will benefit, but they doubt if growth is enough to offset costs

In a scramble to score a legislative win, President Donald Trump and the Republican Party are rushing through a tax Bill that, while likely to spur growth in the immediate term, may well leave the United States saddled with a bloated national debt in the long term.

Democrats and Republicans working to reconcile two versions of the Bill reached a deal on Wednesday. The need to rush it through was strong, and discussions were reportedly occasionally acrimonious.

Republicans have accused the Democrats of obstructionism.

Another feature of the Bill is a corporate tax rate cut - from the current 35 per cent to 21 per cent - designed to restore America's global competitiveness.

Business sectors have widely welcomed the cuts.

The Republican Party, bruised by its loss in a senate race in Alabama, badly needs the win.

On Wednesday, Mr Trump, flanked by a selection of middle-class families from across America who would benefit from tax cuts, made a strong pitch for the Bill - the most sweeping tax reform and reduction legislation in decades - to be ready by Christmas.

"As a candidate, I promised we would pass a massive tax cut for the everyday working American families who are the backbone and the heartbeat of our country," he said.

President Donald Trump, flanked by middle-class American families who would benefit from the tax cuts, making a strong pitch on Wednesday for the tax Bill to be ready by Christmas.
President Donald Trump, flanked by middle-class American families who would benefit from the tax cuts, making a strong pitch on Wednesday for the tax Bill to be ready by Christmas. PHOTO: NYTIMES

  • WHAT IS IN TAX BILL

  • The deal reached by Republicans in the US Congress clears the way for final votes next week. The following are the known provisions on which House of Representatives and Senate tax writers have agreed.

    CORPORATE TAX RATE: Falls to 21 per cent from 35 per cent.

    PASS-THROUGH BUSINESSES: Creates a 20 per cent business income deduction for owners of pass-through businesses, such as sole proprietorships and partnerships. The House had proposed a 25 per cent tax rate; the Senate, a 23 per cent deduction.

    CORPORATE MINIMUM: Repeals the corporate alternative minimum tax, which was set up to ensure profitable companies pay at least some federal tax.

    TOP INDIVIDUAL INCOME TAX RATE: Falls to 37 per cent from 39.6 per cent. The House had proposed maintaining the 39.6 per cent top rate and condensing the current seven tax brackets to four. The Senate had proposed cutting the top rate to 38.5 per cent and maintaining the seven brackets.

    STATE AND LOCAL TAX: Both the House and Senate had proposed scaling back a popular individual deduction for state and local tax payments by limiting it to property tax payments and capping it at US$10,000 (S$13,480). The compromise Bill is expected to keep that cap, but also allow for continued deduction of state and local income tax payments.

    REUTERS

"Now we are just days away from keeping that promise. We want to give you, the American people, a giant tax cut for Christmas."

The Internal Revenue Service had informed him that if the Bill were to be signed into law by Christmas, tax cuts would start taking effect from February pay cheques, he added.

Opinion in the US is sharply divided. Polls show that most Americans believe the tax cuts will end up benefiting only the wealthy.

On Wednesday, Mr Trump tried to counter that narrative.

Family after middle-class family, dressed in their best for the occasion at the White House, spoke briefly about how they would use the savings from the tax cuts.

"People may be excited about the idea of a couple of thousand dollars in the form of a tax cut and be less aware of the damage created by the higher national debt," Ms Maya MacGuineas, president of the bipartisan non-profit Committee for a Responsible Federal Budget, told The Straits Times over the phone.

"On one hand, people are evaluating how this will affect them in terms of tax cuts.

"On the other hand, the purpose is to grow the economy. The question is how much growth and who will receive that growth, and how will it be spread.

"Growth is good for everybody, but it is certainly likely to disproportionately help the more well-off," she said.

"The third aspect is the uncounted downside.

"It's going to add, after economic growth, a trillion dollars to the national debt."

Most analysts agree that the economy will grow.

The question is growth for whom, and whether there will be enough growth to offset the costs.

"The growth in terms of government revenues will be about 20 per cent of how much the cuts cost," Ms MacGuineas said.

"So it still leaves a big deficit."

But Treasury Secretary Steve Mnuchin has insisted that the tax cuts will pay for themselves by triggering an economic surge and expanding tax revenues.

A US Treasury analysis expects them to boost economic growth by 0.7 per cent annually, more than making up for their cost.

Soon after Mr Trump made his White House pitch for the Bill, Mr Mnuchin said in a brief statement the Bill would "restore faith in the American dream by creating a simpler, fairer system that will lead to more economic growth and opportunities for everyone".

But a radio interview on Wednesday offered a glimpse of what could lie ahead.

In it, House Speaker Paul Ryan, when asked about the debt, said the government will look at "entitlement reform", or social welfare programmes.

Programmes such as Medicare and Medicaid "are the big drivers of debt", he said, fuelling fears that when the spending cuts come, they will hurt the middle classes and the poor the most.

A version of this article appeared in the print edition of The Straits Times on December 15, 2017, with the headline 'Tax cuts will boost growth, but for whom?'. Print Edition | Subscribe