By Raz Koroh
As soon as the Trump administration unveiled plans to dramatically cut taxes for U.S. businesses and individuals – including slashing corporate tax rate from 35 percent to just 15 percent, reducing tax brackets for individuals from seven to just three with a maximum top bracket of 35 percent compared to the current 39.6 percent, and eliminating estate/death taxes on people inheriting property from their predecessors – most democrats and economists criticize them as mere tools for enriching the rich, whereas Trump’s supporters say that the difference between 1.6 or 1.8 percent current U.S. GDP and 3 percent to result from the plans will create “trillions of revenues and tons of jobs”, to quote U.S. Treasury Secretary Steven Mnuchin. Opinions are sharply divided as to tax cuts being effective for the U.S. economy.Embed from Getty Images
Here are two factors to consider.
Supply Side theory. The idea that tax cuts are beneficial for an economy in practice originates from the 1980s at a time when the (another Republican) Reagan administration tried to resuscitate the slumbering U.S. economy out of inflationary Seventies era. The other plan then was also to boost economic growth via massive public investment in building the military-industrial complex. Thus a mirror image can be seen in the current president’s economic policy just from this aspect. However, the results on the overall U.S. economy is now part of economic history – U.S. fiscal (i.e. government or public) deficit exploded massively to what it is today, a financial “Big Bang” ended in one of the worst financial crises of the century, whilst jobs continued to ship out of the United States to everywhere around the world for industries that the United States could no longer support in a globalized economy. This includes the motor industry, the backbone of postwar U.S. economy, which was largely replaced by the military-industrial complex and continues to this day. Thus, the idea that a Reaganite tax cut will (alone) necessarily result in what Mnuchin predicts needs to be thought out deeper.
Global competition. The sooner President Trump realizes that the U.S economy cannot grow on its own steam by excluding the rest of the world, the better. As it is impossible to imagine how domestic consumption alone can support gigantic businesses that were designed for global trade, and they alone still potentially account for the vast majority of jobs creation in the U.S economy. As presently, the focus of U.S manufacturing industry is in cost cutting (as it has always been!) the primary focus of any U.S president must be to ensure that the U.S offers better cost-efficiency than anywhere else in the world. However, it is plain logic that he cannot hope to do this by clinging to industries that no longer have any cost-efficiency future, whilst at the same time neglecting cutting-edge industries that corporate USA should have been focusing on (such as miniaturized manufacturing, fossil fuel-less transportation and travel, and so on) via investment on necessary infrastructure development and educational policy changes.