The Trump presidency is seven and a half months old, and "The Donald" is arguably still looking for his first major victory in the Oval Office.
Trump rode dozens of campaign promises into the highest office of the land, but he has thus far been unable to deliver on healthcare reform, despite countless promises to repeal and replace Obamacare. Even though the American Health Care Act passed by the narrowest of margins in the House, the bill was dead on arrival in the Senate. As for the Senate, it's been unable to muster up enough support for its version of healthcare reform, dubbed the Better Care Reconciliation Act. Essentially, healthcare reform is at a standstill.
President Trump turns to tax reform
That, however, isn't going to stop the president from pushing for his other major platform in 2017: tax reform.
During his campaign, Trump proposed wide-ranging changes to individual and corporate income-tax rates. For individuals, this proposal called for a major simplification of the U.S. tax code, including a reduction in income-tax brackets from seven to three, along with a reduction in peak marginal tax rates. Trump's tax plan also called for eliminating nearly all deductions and credits and a doubling of the standard deduction for individuals and couples.
For corporations, Trump's focus has been entirely on making America more competitive with foreign countries. At 35%, the United States' peak corporate income-tax rate ranks among the highest in the world, which could be responsible for reducing corporate investment domestically and from abroad. Recently, and during his campaign, Trump has called for a 15% corporate income-tax rate. He's also previously proposed a tax-holiday rate of 10% to allow U.S. multinationals the ability to repatriate their overseas profits at a favorable rate.
Trump shows his hand on corporate tax reform with a single word
Trump opined during a speech at the Loren Cook Co. manufacturing plant in Springfield, Mo., on Wednesday that "lower taxes on American business means higher wages for American workers, and it means more products made right here in the USA." Trump and his administration are expected to unveil a more detailed tax plan in the coming weeks that'll build upon the rough outline that was released back in April.
However, Trump's corporate tax reform aspirations may wind up being a little too lofty. In the same speech that Trump pressed Congress into action and urged them not to disappoint the Commander-in-Chief, he referred to his job-creating, wage-lifting 15% corporate income-tax rate as "ideal." By using the word "ideal," Trump equated the 15% target income-tax rate as utopian and more than likely unachievable, given the need to raise revenue from elsewhere to be budget-neutral.
Here's what's needed to achieve a 15% corporate income-tax rate
Assuming Trump's ideal scenario of a 15% corporate income-tax rate is achievable, reaching a neutral budget over the next 10 years would require the replacement of about $2 trillion in revenue, according to the Tax Foundation. Taking into account compound growth rates in U.S. GDP, Tax Foundation estimates the need for a 0.9% increase in U.S. GDP over the next 10 years. This means if the U.S. economy grew at 2.8% instead of the Congressional Budget Office's prediction of 1.9% over the next decade, Trump's corporate tax cuts (and just the corporate tax cuts) would be paid for.
More than likely, though, the need to make up $2 trillion in reduced corporate tax revenue over the next decade would come from a combination of GDP growth and spending cuts. Trump has already proposed significant spending cuts on certain programs in Washington, including the Environmental Protection Agency, nutritional assistance, and welfare programs, and he's pushed for the repeal and replacement of the Affordable Care Act (ACA). Even though the GOP's ACA replacement efforts have been unsuccessful, the savings behind their proposals, which are mainly a result of cuts to Medicaid, could trim between $100 billion and $300 billion from the federal budget over the next 10 years.
Two major issues with Trump's utopian corporate income-tax rate
Unfortunately, Trump's corporate tax plan also comes with two pretty notable flaws that could throw a monkey wrench into his "ideal" growth plans.
The first major issue is that Trump is looking to pass corporate income tax reform when the U.S. unemployment rate is at 4.3%, its lowest level since May 2001. Trump is counting on corporate expansion and hiring, along with wage growth, to pick up the majority of the slack in the aforementioned $2 trillion revenue reduction caused by slashing corporate income-tax rates.
However, at 4.3% the U.S. economy is already below what the Federal Reserve estimates is the natural rate of unemployment, defined as 4.5% to 5%. The natural rate of unemployment factors in frictional unemployment (i.e., workers who are in between jobs, recently moved without lining up another job, or quit), structural unemployment (the mismatch between workers' job skills and employers' needs), and surplus unemployment (e.g., government intervention in minimum wage laws). As the name implies, there will always be a "normal" level of unemployment, and we're at the bottom end of it right now. In other words, job creation and wage growth may not be anywhere near as robust as Trump has suggested.
The other issue is that Trump's efforts to put more money in the pockets of corporations won't give him the right to dictate where that money is spent. In other words, Trump believes that lowering corporate income-tax rates will allow companies to add more workers and boost wages, but that's not a guarantee. Public corporations could choose to repurchase more of their common stock, increase their dividends, make acquisitions (which could result in layoffs), or hoard cash. There's nothing in Trump's plan that guarantees corporations will use their extra capital in the way Trump wants.
We should hopefully have more details from the administration in the weeks to come, but as things stand now, Trump corporate tax reforms may not meet the mark.
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