THE latest American tax reform initiative, besides rationalizing a slew of inconsistencies in the American taxation regime, is in essence a plan for massive tax reduction. And it would appear that it is something both President Trump and the Republican congressional leadership must undertake at this juncture.
Trump was a businessman before and even during his recent forays into politics, so it could be said that he understood the impact of taxation on business growth. And Trump entered American politics in a somewhat unconventional manner. Most other politicians, including fairly rich ones, would have worked from the bottom up, running first for local public office (such as mayor or city councilor), then state-level positions (such as governors), before embarking on national politics (such as senators and eventually president), gaining name recognition and thereby political support in the process.
But Trump, with his characteristic pompous self-regard and enormous financial chest, bypassed the initial political stages mentioned above. He rammed through the Republican presidential primaries, got himself nominated by the party for the presidency and even surprisingly clinched the ultimate trophy. It is of course a huge cause for celebration for the Republican Party, but also a cause for weariness and even outright envy and disdain from many in the Republican senior (especially congressional) leadership. In the extremely liberal political order of America, where the “party whip” (disciplining congresspersons of a party into submitting to the party leadership’s will) system is at best wimpy, more than a few Republican mavericks and stalwarts hold out openly against Trump, and even the mainstream party senior leadership offer at best only lukewarm appreciation to an upstart Trump administration.
But in the check-and-balance political system that is America, Trump would need the strong political support of at least the Republican congressional leadership in order to realize his political agenda, if any. So, he had to propose a national initiative that is dear to both his and their hearts. And tax reform, or more appropriately, tax cuts would indeed be such a pulsating issue for all Republicans. Thus, the tax initiative.
For the congressional Republicans, this is definitely not the first time for them to hold the majority in both houses of Congress, and with the White House occupied by a Republican. But a tax reform bill of such magnitude has not been seen since the days of President Ronald Reagan, another Republican, but with a Democratic majority in Congress. A lack of strong congressional and White House leadership, coupled with the fear of losing swing votes to the Democrats in view of the latter’s imaginable strong opposition to such tax cuts, resulted in no major tax reform bill for a few decades.
With Trump and the Republican-controlled Congress pushing for tax reform, they could also wash away their previous failed attempt at overturning the much-maligned Obamacare health insurance policy. At long last, at least there is something in terms of political achievement to show for the Republican party which won by a landslide in the elections a year ago.
Although the tax reform bill will still have to be “reconciled” between the House and Senate versions, its key aspects can already be gleaned. On the personal tax front, there is actually little to show, as the cuts are really minimal, with a percent or two only. The real deal comes in corporate tax, the top bracket of which will now be taxed at only 20 percent as compared to the previous whopping 36 percent. There are concerns expressed that tax cuts of such a massive scale would engender high deficits for years to come. But to the Republicans, deficits are mainly caused by too many government handouts in the first place, which in any case pander to the interests of the Democrats and therefore should be cut. Moreover, Republicans believe that lower taxes would stimulate the interest to engage in business and thereby the tax shortfall is not as significant. Never mind that the Reagan tax cuts demonstrated that most of the tax savings are usually not channeled by businessmen into business reinvestment, but thrown into supposedly higher-yield sectors such as financial investment and real estate.
Of course, those of us in the developing countries are more concerned over whether this latest round of American tax cuts would cause the repatriation of American investments overseas, for American investments to pull out and return home. In principle, Trump’s attempt at realizing his “America First” policy by means of huge tax cuts to lure overseas American businesses back home is not unsound, as many other jurisdictions can enact similar tax cuts to ensure American businesses stay on with them. Quite a few other jurisdictions with traditionally low tax rates (such as topping at 16 percent) would have to reconsider their respective tax regimes in view of the comparability of the new American tax regime. Other developing countries would have to embrace the reality that new American investment may come far and fewer in the future, as the cost of doing business back home for American businesses has been significantly lowered.