For nearly a decade, The United States was a global leader in an undesirable economic category, corporate tax rates. As a result, private capital investment largely left American markets in favor of lower tax environments, as global investors sought to maximize returns. Furthermore, the shift harmed employment and mitigate our competitive advantage. President Trump campaigned on tax reform and delivered it, hoping to sustain the economic revival that coincided with his ascension to office.
First off, taxes are essential for any government to perform services, protect communities, invest in the economy, and move society forward. In the United States, the federal government attains revenue largely through two tax codes, one levying taxes on personal household incomes and the other on corporate profits. Between these two codes, the federal government receives over $4 trillion to allocate throughout the federal budget.
There are some fundamental questions that need consideration when evaluating changes to tax code. What will be the economic impact of the specific legislation enacted? How will the reform impact government coffers and its ability to provide vital services? Finally, how effective was policymakers’ situational awareness in crafting the legislation.
President Trump and Congressional Republicans crafted tax reform to simplify the personal tax code and make the corporate tax code more competitive. Based on the consolidation of middle brackets, many middle and working-class Americans will benefit from tax reform. But, the big game changer will be reducing the corporate tax rate by nearly 14%, as it will help fuel employment and economic growth started by regulation reforms and pro-growth policies already in place.
To this point, tax reform is performing as many supporters expected. Despite opponents claiming tax reforms will lead to more benefits for the rich and crumbs for the rest, many firms immediately provided higher wages and performance bonuses for workers and invested in domestic operations and new hires. A complete reversal of the prior eight years, where companies and firms found it more profitable to invest in emerging economies and their low wage labor markets. Reducing the cost advantage, domestic labor and operations are more realistic.
Again, the tax reform, combined with efforts to reduce burdensome regulations and balance global trade, can sustain economic growth and expand manufacturing. American manufacturing is a world leader in high tech high skilled production, but needed help to reduce the cost disadvantage. Now, global producers can not only provide solid returns to attract investment, but market higher quality products to consumers at the same time.
Despite the positive outlook and aspirations for sustainable growth, one must consider the potential risks and concerns with investing in growth. Many opponents to allowing workers to keep more of their hard-earned money focus on the impact tax cuts can have on the federal coffers, which government uses to fund operations. In the short term, tax cuts can reduce revenues attained as tax cuts continue to circulate through the economy.
In contrast, supporters of tax relief generally believe the economic growth can generate tax revenues that will eventually offset early revenue losses. In addition, the ideal that increasing the base of taxpayers is preferable to raising the tax burden on the current population of workers. Although principles are generally agreeable, not all of the new economic activity is taxable and government spending is not pegged to revenue intake. Without adjustments to spending, short term deficits typically are a result of tax cuts.
For the current tax reform, the CBO projected nearly a trillion in deficits over a decade, caused by lower revenues. While that is a big number, the government will bring in over $40 trillion over that time period. Additionally, Americans experienced far more significant budget deficits than this will cause, without the benefits of tax reform. But, policies that add to the national debt should be offset, which can be achieved by reducing government spending on non-essential areas.
Finally, policymakers need to consider situational factors before implementing changes to our tax code. Consider the economic environment when the fair share movement to raise both personal and corporate rates. Both the global and domestic economies were fragile and plagued by uncertainty. Not surprising the economic results were stagnation, low employment, and no wage growth. In addition, global investors moved capital to more favorable markets.
Conversely, the situational factors when the GOP and President Trump implemented tax reform strongly called for stimulating personal spending and making the domestic market more affordable and competitive. Increases and reductions can both be effective tools in growing and stabilizing the economy. But, elected officials need to effectively evaluate the economic environment and not exclusively rely on possible political outcomes.
Outcomes of a tax cut or tax increase are largely subjective to the underlying economic situation of the time enacted. During times of prolonged growth and expansion, tax increases can be effective in stabilizing the economy. Unfortunately, the tax burden on our economy was largely enacted when American businesses and workers were at the weakest point.
Given the clear need for reforming our tax code, one must consider the tax reform bill the right prescription for our economy. Americans are finally getting back in the workforce and seeing their wages rise. Despite the doubts on manufacturing returning, it is coming back to some degree. Greater focus will need to be paid to deficits and overall natural debt. But, tax reform is proving to be a success.