The paper should include a summary of the new tax reform that was passed by Congress and signed by President Trump in December of 2017. After the summary of the major reforms, please compare this reform to the theory of optimal taxation. Which aspects of the reform are consistent with Haig-Simons and Optimal Tax Theory? Which aspects of the reform are not consistent with economic theory of taxation and why do you believe they were included?
Solution
In December, of 2017, President Trump signed new Tax Reforms, which aimed to cut taxes around $1.5 billion. The assertion was that the changes in tax policy would energize the United States’ economy, which was strongly affected by the 2007 economic recession. Generally, governments around the world, use expansionary fiscal and monetary policies to mitigate the ramifications of the economic crisis. The introduction, of Tax Reforms by Republican Congress, was, in fact, an effort to boost the American economy, which had not expanded enough to intensify economic activity to restrict unemployment at a natural level. Also, since 2007, the American economy had not positively affected nominal wages, which affect consumption in short-run.
SUMMARY OF TAX REFORMS
- The prime focus of the Republican Tax Reforms is corporate tax. As per some estimates, American firms pay taxes from 15% to 35%. As per new tax policy, the corporate tax would be 21%, which will be effective from 2018.
- Health insurance was a requirement, which implies that it was imperative to carry health insurance or face tax penalties. The introduced tax reforms have the code, which eliminates such tax.
- The new tax policy/regulation also affects income, as the income tax, applicable on the particular amount, has been For instance, the top rate of 37% would be applicable on income over $500, 000 (for individuals), and $600, 000 for couples. These new lower income rates will expire in 2025.
- The new policy (tax) has also swelled the size of standard deductions; however, it offers less targeted perks. As per information, tax reforms have doubled the size of standard deduction; $12000 for individuals and $24000 for married couples.
- Reforms have also expanded the tax credit for children (for families that make less than a certain amount). The plan offers $2000 in tax credit to more families than previous.
- For American companies that earn profit overseas, tax rates have lowered, which will facilitate these companies expand their corporate footprint in both abroad and home (BBC News).
Optimal Tax theory states that tax policy must address inefficiencies of markets and also distortions of the markets, in a particular economic framework. It is asserted that lower tax ensures that there are few market distortions, as the size of tax influences investment, especially in a capitalist economy, where debt/equity ratio is high (capital structure of a firm is flexible). The optimal tax policy also asserts that taxes must be certain (taxpayer must know where they would fall) and they must be easy to pay. During the economic recession, the size of consumption decreased, which shifted demand to the left, causing serious dwindle in profit. Therefore, it became difficult for American companies paying their taxes, which reduced their economic activities. The new tax policy aims to increase the size of the profit (the ultimate goal of any firm), which will trickle down in the form of increase in employment and nominal wages (Boadway).
THE INCONSISTENT PART
Tax Reforms focus on large corporations, and they seem to benefit the only wealthy class of the United States. It is based on trickledown theory, which states that economic benefits trickle-down. For instance, the lower corporate tax will increase economic activity, which will affect both employment and consumption. However, studies reveal that current, low wages are a serious issue and industries in the US are not willing to increase nominal wages. Also, Middle Class’ Marginal Propensity to Consume is greater (and healthier) than all other classes, which is why the focus of these tax reforms must have been Middle Class of United States. Consumption is considered engine of United States’ economic growth and this consumption is fueled by middle-class Americans (Tankersley).
Work Cited
BBC News. “What is in Republican tax plan?” BBC News. BBC News, 19 December 2017. Web. 18 May 2018. http://www.bbc.com/news/business-42375212.
Boadway, Robin W. From Optimal Tax Theory to Tax Policy: Retrospective and Prospective Views. MIT Press, 2012.
Tankersley, Jim. “Fed Officials Worry the Economy Is Too Good. Workers Still Feel Left Behind.” The New york Times. The New york Times, 26 April 2018. Web. 18 May 2018. https://www.nytimes.com/2018/04/26/us/politics/fed-economy-overheating.html.
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