Fantasy tax plans?

Headlines reporting new US tax plans were misleading. What we’ve got was little more than Trump’s wish list – a re-statement of promises made during his election campaign, comprising a proposal of radical changes to taxation in the US.

In the broadest sense, an overhaul of the incredibly complex system of taxation in the US makes perfect sense and is long overdue. The proposal outlines a reduction in the number of individual tax bands from seven to three, for example, as well as a massive reduction in business tax rates from 35% to 15%.

Could tax cuts drive growth?

What isn’t clear is how these tax cuts will be paid for. With an estimated revenue reduction of $7tn over ten years – it seems an obvious question to ask. Trump’s response is typical of what has been a hallmark of his period in office so far.

Treasury Secretary Steve Mnuchin has asserted that the faster growth that tax cuts will create mean that the proposals will pay for themselves, but without offering much evidence in support and no objective costing of the proposals.

The assertion is that annual GDP growth of 4% will be achieved by the tax cuts. But that seems unlikely. Unemployment sits at 4.6%, its lowest rate since 1975, providing little wiggle room for further falls if the economy accelerated from the current 2% growth to 4%. In any event, the potential of increased inflation would likely result in the Fed raising interest rates – a further constraint on growth.

A stake in the ground

This is all largely academic and while it certainly points to who the winners from a Trump presidency are likely to be – namely those on high incomes and big businesses – it’s by no means a done deal. There is much jockeying to be done and with the Congressional Oversight Committee (COM) likely to take the more conservative view of growth, the Committee for a Responsible Federal Budget (CRFD) keen not to increase the budget deficit even in the short-term, and no super majority in the Senate to push his proposals through, Trump’s wish list looks set to remain just that.

What the proposal does do is to throw up more questions than answers. And that’s perhaps Trump’s tactics, to negotiate from a position so extreme that change is inevitable. We will have to wait and see.