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TAX REFORM

CRC REVIEW

For nearly a decade, the United States was a global leader in an undesirable economic category, corporate tax rates. As a result, capital need to fund economic activity fled our borders. Global investors sought to maximize gains by funding operations in lower cost environments like China, India, and other emerging markets. While some felt it was inevitable, many believed changes in our tax code could facilitate a shift back in our favor. Not surprising President Donald Trump made tax reform a key component of his 2016 presidential campaign.

 

Societies need taxes to fund vital public services as well as fuel investments in our domestic and broader national interests. In the United States, the federal government generates revenue from a variety of sources, but two main revenue channels are common focus of fiscal policy. The bulk of federal receipts come from the federal personal income tax code, which taxes wages and other forms of income on the individual and household level. Additional revenues come in the form of taxes levied upon the profits of businesses. Other revenue sources fund specific program or levied on specific activities.

 

There are some fundamental questions economics consider when evaluating potential changes in fiscal policy. What is the economic impact of the proposed policy? Does the policy address and solve a specific social economic problem? What are potential unforeseen problems caused by the proposed policy? In changing tax policy, one needs to understand what the societal goal is and how it will impact other areas of society and government.

 

The clear economic problem President Donald Trump inherited coming into office was a slow growth economy that failed to effectively create jobs. Combined with other economic policy reforms, the Trump Administration and Congressional Republicans crafted a plan to revise corporate tax rates to better compete in the global market as well as provide tax relief to millions of taxpayers struggling with excessive taxation. The Trump Tax Reform bill consolidated tax brackets for many middle- and working-class families, increasing take home pay by hundreds each paycheck. The gamechanger was reducing the corporate income tax to 14%, which will help American markets appear more cost competitive to our counterparts. The hope is to fuel investment into domestic economic activity and provide families with funds to circulate through our economy.

 

The immediate impact of enacting tax reform was largely what policymakers hoped for. Companies committed to hiring more domestic workers. Many companies invested in bonus pay to workers and investments in relocating manufacturing back within our borders. Domestic production always possessed a competitive advantage of high-tech production and quality focus that not many compared to. Now, the cost barriers reduced, making a homecoming more feasible to investors.

Opponents of tax reform center their argument around the perceived disparity in benefit as well as potential impact offsetting revenue loss will have on government. Higher earners potentially will have higher dollar tax savings because this group pays the bulk of income taxes at any level of government. The goal is higher earners will invest savings, which creates funds for jobs for lower earning workers. Government typically experiences deficits in the early years of tax reform. This is usually offset by additional revenues in areas the CBO and other government forecasters do not include in tax projections.

 

There are many factors investors, including public sector investment arms, consider when committing funds. The return on investment is a critical factor. Sustainability of investment. The American economy did not provide an attractive environment to entice foreign or domestic investors. Redundant regulations and excessive taxation on top of high labor costs served as major deterrent for investment. Change was not a partisan issue, but an obvious need for growth.

The Trump Tax Reform effort can be considered a successful implementation of economic policy. Policymakers will need to remain vigilant on impacts on our national debt and offsets with local tax policies. The American economy needed tax reform, which some on the left remain steadfast against. Now, America is experiencing economic growth that few believed was ever possible.