“Massive tax cuts for working families across America,” was how Donald Trump described the tax bill, which passed the Senate on Saturday, in the first legislative success of his Presidency.

Trump’s main promise in his campaign was to ensure that middle class families can make ends meet. President Trump claimed that:

  1. Tax relief for Americans (especially the middle class) would help people achieve the American dream and let them keep more money instead of paying it in taxes.
  2. President Trump wanted to simplify the tax code and let everyone keep more of their money. Because lets face it doing taxes is a huge headache.
  3. President Trump also has a main aim of increasing jobs for Americans. It’s a basic economic principle: if tax rates are cut for businesses they would be more likely to invest because they get to keep more of their profits. This will make America globally competitive again.
  4. However Trump claims that it will not add to the American debt. This is something that I do not agree with economically speaking.

What is this tax reform package?

The Senate’s bill lowers the top individual income tax rate from 39.6 per cent to 38.5 per cent and slashes the rates for most lower income tax brackets too.

Other major changes are a doubling in the exemption of the US version of inheritance tax and increasing access to a child tax credit.

For firms, the bill cuts the headline US corporation tax from 35 per cent to 20 per cent.

There’s also a tax cut for businesses structured as “pass through” entities, which means their income “passes through” to their owners and is taxed at personal income tax rates. The top tax rate on income earned from these entities is due to fall from 39.6 per cent to 15 per cent.

The tax cut for “pass through” companies is also likely to benefit wealthy individuals most of all. One major user of these structures is Donald Trump himself.

What about the impact on the US economy?

A group of economists wrote an open letter in the Wall Street Journal last month supporting the President’s tax cutting efforts and suggesting that the package could boost the US economy by 3 to 4 per cent in the long term.

A larger group of economists (137 in all) wrote an open letter making similar assertions.

What about the US deficit?

The Treasury Secretary Steven Mnuchin, a former Goldman Sachs banker and Hollywood financier, claimed in September that the tax cutting legislation would raise US GDP so much that it would not increase the country’s deficit (the gap between tax revenues and public spending) over the long term. Indeed, he even claimed it would ultimately reduce the US national debt.

The Byrd rule

The Byrd rule limits the types of legislation that can be moved through Congress under what’s known as budget reconciliation. Normally 60 votes are required in the 100-member Senate to bring debate to a close. The Senate’s reconciliation process, which allows for budget-related bills to be passed with a simple majority, was originally designed to pass difficult deficit-reducing bills that raised taxes and cut spending.


To meet the conditions of budget reconciliation, the bill would have to produce no revenue losses, beginning in 2028. Thus, Republicans ostensibly hoped that the JCT would find their bill producing smaller and smaller deficits over time. Instead, the committee found that the GOP plan would produce its largest deficit — $216.7 billion — in 2027.

You can’t erase $200 billion in annual deficits through budget gimmicks, alone. You can’t do it through giving the existing bill a nip and tuck. Heck, you can’t even do it by ripping out the heart of the GOP plan: Republicans could leave the current corporate tax rate at 35 percent, and their bill would still be too expensive to pass.

What’s more, the Senate legislation relies on the repeal of the state and local tax deduction for more than $1 trillion of its new revenues. But House Republicans have already signaled that they don’t have the votes to repeal that benefit. So, in all probability, Mitch McConnell has far more than $200 billion a year to make up, if he wishes to pass Trump’s tax plan into law.

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