Two things in life are certain: death and taxes. And Congress deals with both.
Congress recently passed the Republican tax bill along strict party lines. The bill was rushed, with little time to debate or even read it beforehand. The process was reminiscent of passing the Affordable Care Act, in that it emerged with the support of only one party — Democrats then, Republicans now. Partisanship has grown so toxic that long overdue legislation such as health care, immigration and tax reform are held over a barrel by extremists and obstructionists.
Fiscal policy can be complicated. The Federal Tax Code is so complex that any meaningful change may have unintended consequences to taxpayers and the broader economy. One thing that is clear is that a rising economy replenishes tax revenue coffers, which in turn allows more funding for social programs, infrastructure, addiction rehab and health care. The centerpiece of the new law is a reduction in the corporate tax rate that should provide a catalyst for annual growth beyond 3 percent – something this nation has not experienced since 9/11.
The reduction in corporate tax rate has long been a bipartisan initiative. In 2012, President Obama proposed a reduction from 35 percent to 28 percent. In 2017, the United States and France led the developed world with the highest corporate tax rates. France is set to reduce theirs to 28 percent, while the United States’ rate will go down to 21 percent. We cannot ignore the collapse of trade barriers and the emergence of China, and the European Union, as economic engines that exceed that of the United States.
It is too early to forecast the long-term impact of this bill, but already we are seeing corporations announcing billions in new capital investments and a rise in wages. The stock market alone has added $2 trillion in anticipation of this bill – something everyone with individual 401k’s and savings accounts has seen this year.
Beyond corporate taxes, the tax bill also includes a reduction in individual rates, an increase in the standard deduction (from $12,000 to $24,000), an increase in the child tax credit and an offset in a reduction in itemized deductions such as mortgages and state and local taxes. These provisions should benefit many taxpayers in Utah, and many are using a “tax bill calculator” to estimate their tax savings.
In an ideal world, Congress would be able to garner bipartisan support for major legislation like tax reform — as it did in 1981, 1986 and 1991. The absence of such compromise threatens every piece of major legislation and makes it vulnerable to partisan attack as soon as majorities in Congress shift. Additionally, President Trump’s populist promise in the 2016 campaign to eliminate tax advantages for carried interest — or a share of profits generated by wealthy hedge funds and private equity firms — will unfortunately remain unfulfilled.
There were definite flaws in the process used to pass the tax bill. Its impact on individuals will vary. But it will allow investors and corporations to finally make long term investment decisions, for the first time in over 16 years.
If the changes ignite the sort of economic growth its advocates expect — as much as a 4 percent growth in GDP — Trump is likely re-elected. But if the economy flat-lines, or even softens, Trump and the GOP will likely be annihilated at the polls in 2020. His presidency is riding on this bill. It is always the economy, stupid.