US tax cuts ominous news for world’s poor

By Li Hong Source:Global Times Published: 2017/12/13 22:03:39

Illustration: Peter C. Espina/GT



 

Asked by a Chinese friend living in Miami for my opinion about US President Donald Trump's push to get tax cuts through Congress, my knee-jerk response is that it will exacerbate the divide of the haves and have-nots, lead to surging federal budget deficits, and leave the US' next generation to foot the bill for this generation's enormous irresponsibility.

The move is a gambit by Trump and his Republican followers to offer tributes to the wealthy and powerful in the US, at the cost of the middle class and the poor. In the beginning, there may be many Americans who see their tax bills fall. But after a while, they will realize that the biggest beneficiaries of the tax cut will be US businesses with the highest profits and individuals with the highest incomes.

In addition, the US national debt has shot up to more than $20 trillion and the deficit is growing by the minute. As the country is veering toward a public debt crisis, the fact is that it just cannot afford higher deficits.

My friend seems dubious about the bill. Some pundits in America predict that the US economy, aided by the Trump tax reduction, could double in the next 10 years. As the benefits trickle down, the majority of US households are likely to see their incomes soar, my friend is told.

The latest credible opinion poll done by Quinnipiac showed that as of December 5, 53 percent of Americans disapproved of Trump's tax cut plan, while just 29 percent approved, which was a remarkably negative showing for something that ought to be spectacularly popular.

Whether Trump's huge tax cuts incite a race among other major economies to lower their tax rates remains to be seen. The result would be undeniably ominous for the poorest all over the world, because the richest people always tend to enjoy the windfalls.

It is reasonable to query the true intentions of Republicans to approve tax cuts at a time when the world's largest economy is doing fairly well. Just a few years ago, they blocked all stimulus proposals former president Barack Obama and the Democrats made in the aftermath of the financial crisis. At that time, they believed that budget deficits were a bad thing. Now, they're rushing to cut taxes.

If these drastic tax cuts succeed in drawing vast amounts of capital back to the US from Europe, the Middle East, Asia and elsewhere, a substantial proportion of that capital will flow to Wall Street, adding to the euphoria among investors and speculators, buoying the already-elevated Dow and NASDAQ indexes to sky-high levels, and possibly making equity bubbles burst at an earlier date.

It may sound too pessimistic. But the odds that Trump's tax cuts will match the benefits that late US president Ronald Reagan obtained from similar moves are slim. Reagan's supply-side economic initiatives, dubbed "Reaganomics," advocated tax cuts and economic deregulation to spur growth. During his years in office, from 1981 to 1989, the US economy saw a reduction of inflation from 12.5 percent to 4.4 percent, combined with an average annual economic expansion of 3.4 percent. That was a feat envied by other US presidents who have held office since the end of World War Two, including Trump.

In sharp contrast to the ebullience among Republicans in Congress, the Democrats dislike the legislation. With massive tax cuts, government spending on infrastructure, education, medical care and social programs will have to be cut, if Trump holds to his bid to shore up the military with stacks of money.

Trump administration officials have argued that the tax cuts would pay for themselves via a surge in economic expansion. The Congressional Joint Committee on Taxation punctured that fantasy balloon a few days before the Senate vote, however, estimating that the growth spurred by the tax cuts would offset less than one-third of the $1.5 trillion cost over the coming decade. The tax cut bill will not work miracles for the US economy.

That's no surprise - history tells us that even when tax cuts do boost growth, they never do so to the extent needed to compensate for the lost revenue. With US government deficits surging and surpassing the country's annual GDP, the next generation in the US will have to pay for the mounting debt.

The author is an editor with the Global Times. bizopinion@globaltimes.com.cn



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