DEBATE: Will Trump’s overhaul of the US tax code be beneficial to the American economy?

Republican National Convention: Day Four
This is the most significant reform of the tax code in decades (Source: Getty)

Will Trump’s overhaul of the US tax code be beneficial to the American economy?

David Hawkins, managing director of Cliveden Family Office and former board member of Republicans Overseas, says YES.

The Trump administration’s competitiveness agenda implements the greatest reform to personal, small business and corporate taxation in the US since 1986. Not since Ronald Reagan has the federal government been so focused in reducing taxation for all Americans.

Under the Tax Cuts and Jobs Act, a median-income family of four earning $73,000 annually would save $2,059 in taxes in 2018. For corporates, federal rates will fall from 35 per cent to 21 per cent. The plan also amends the code for overseas corporates to a territorial-based system, substituting paying tax on overseas income with one-off payments – key Trump campaigning issues during the last election.

Already, the stock market has been pricing in these reforms. As the Tax Policy Centre has analysed, the legislation will see an immediate boost to GDP by 0.7 per cent, settling down to 0.6 per cent each year until 2025 when many of the cuts expire. This puts Donald Trump’s target of four per cent GDP growth within easy reach.

Read more: Trump nears legislative victory as tax reform heads to Senate for approval

John Ferguson, director of global forecasting at the Economist Intelligence Unit, says NO.

The Republicans’ tax plan will only have a modest impact on real economic growth. Despite being the most significant reform of the tax code in decades, a number of factors will limit its effect.

First, the US business cycle is approaching a post-war record of continual expansion, implying that there is little spare capacity that can be easily brought into production without stoking inflation.

Given this recent growth, corporations are already sitting on piles of cash – the additional revenue saved from a lower corporate tax rate is unlikely to incentivise firms to significantly increase their investment plans.

Moreover, thanks to deductions, the effective tax rate paid by corporations is much lower than the current corporate tax rate of 35 per cent, so the change in corporate profits will be less dramatic than the bill suggests.

Finally, even if the tax reform is more stimulatory than we expect, the Fed would respond by additional rate increases, thus constraining the impact on growth.

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