The tax reform bills which have recently been passed by the U.S. Senate and House of Representatives potentially introduced significant changes to U.S. tax law. This has been strongly pushed by Donald Trump. Here is a summary of the changes:
- Reduce corporate tax rate from 35% to 20%
- The highest personal tax rate has been reduced
- Inheritance taxes threshold has been raised from $11.2 million $22.4 million
- Some tax reductions which affect the middle class, but which expire in 2026
There is no doubt that the U.S. tax system needs reform. Although the corporate tax rate is 35%, in practice, the average tax rate actually paid by U.S. corporations is only 18.7% (by one estimate). The difference is due to all the deductions, exemptions and loopholes embedded in the tax code. Many of these are industry specific and are the result of years of successful lobbying by particular industries. As a result, the tax code introduces distortions in the economy which are not in the best interests of the country.
The tax reform has been sold as a needed stimulus for the economy, which will increase investment, hence increase productivity and lead to increased job creation
The reality is quite different:
- No need for a stimulus at this time
- Tax cuts for corporations will not flow into productive investment
- Changes will raise the deficit by $1.3 trillion over 10 years
- Tax cuts for individuals will not spur consumption or investment in the U.S.
- Inheritance tax threshold will have a negligible effect
I shall now expand on these in greater detail. Continue reading “U. S. Tax Reform – Wrong Policies, Wrong Reasons, Wrong Time”