The Washington Examiner is reporting that the Trump Administration and congressional Republicans are undertaking Tax Reform that they feel will be even more transformational than the ones adopted during the Reagan presidency. The approach will be to cut tax rates for both individuals and businesses, including small businesses that generally do not incorporate, and at the same time cut out a large number of deductions. The corporate tax rate would be reduced to 15 percent, for example, making the United States a more attractive place to invest in.
The new tax code would remove a lot of distortion that the old one has created in the American economy, hence fostering economic growth and job creation.
Opposition to tax reform will come from several fronts
Liberal Democrats will oppose the tax reform package as constituting “tax cuts for the rich.” The argument by sloganeering has a basis in truth. The well off, including investors and businesses, pay the most taxes. A tax cut, especially one that is designed to stimulate economic growth, would benefit this group the most.
More serious is the opposition from interests that would lose various tax deductions. The most radical change to the tax code would be the elimination of deductions for state and local taxes.
The deduction constitutes a subsidy to high tax, high spending states such as New York and California. If it survives in the eventual tax reform legislation, the measure will force the adoption of fiscally conservative policies in liberal states, something that the Trump Administration desires.
Deficit hawks might also be leery of reform of taxes because some analysis suggests it would cause a $1 trillion to $2 trillion shortfall in revenue over ten years.
Supporters of tax reform indicate that the lost revenue would be made up with increased tax receipts due to greater economic growth and business activity.
The political stakes for Trump
Donald Trump was elected president in part on his promise to end the Economic Malaise of the Obama years and to bring back robust economic growth.
The tried and true method for Republican administrations for accomplishing this task has been tax reform. Tax cuts worked brilliantly during the Reagan years. Trump hopes to replicate or even exceed the Reagan economic miracle.
If Trump can pass tax reform and it sparks an economic boom, he and his Republican allies will be assured of reelection and Democrats of remaining in the political wilderness. For that reason, more so even that Obamacare repeal and replace or building the Wall, tax reform is the singular priority of the Trump first term. Otherwise, there might not be a second one.
