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Will Trump’s tax plans work?

Donald J Trump is toasting his 100th day as President of the United States, and to celebrate he promised the biggest tax cuts in American history. His team went as far as calling it a “once in a generation” opportunity. So was a one page hand-out of double-spaced bullet points really enough?

Trump’s had some trouble delivering everything he promised he would in his first 100 days in the Oval Office. Two of his flagship, yet controversial, policies on immigration and Obamacare are sat gathering dust after being shelved.

As president of the United States, Trump has the power to dictate financial sentiment across the world. We in the UK are the second largest global exporter of services and America is our largest customer.

If Trump can boost the economy and employment, as he’s promised, American firms may loosen their purse strings and send more business our way. This could add further support to our growing economy.

What are Trump’s tax reforms?

Unveiling his highly-anticipated tax reforms, Trump wants to collapse the seven individual tax brackets down to three bands of 10%, 25% and 35%. He also wants to double the standard deduction – equivalent to the personal income allowance – and provide tax breaks for those families with child care expenses. The death tax could also be on the way out.

The president’s plan to slash corporation tax from over 30% to 15% immediately stole headlines, and he briefly outlined an idea to encourage US companies to bring profits held in foreign accounts back into America. Markets were excited with the prospect of additional share buy-backs or special dividend pay-outs.

Despite the rhetoric, Trump’s reforms immediately came under fire for giving a big tax break to the wealthy. It’s hard to make detailed analysis from the 19 bullet points, but Trump’s middle class voters may be feeling a little side-lined, especially as he’d promised them the largest tax reductions during his campaign.

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To be fair to Trump, it’s easy to see why a Republican administration would have corporation tax in its sights. The US has one of the highest rates in the world, second only to Colombia¹. Although the effective rate is quite a bit lower, at least for big exporters, as some of these earnings are generated outside of the US.

What will these tax cuts achieve?

Trump wants to create jobs and grow the economy, but will tax cuts actually help? No one knows how much they will cost yet, but the Committee for a Responsible and Federal Budget are estimating between $3-$7 trillion.

Optimists believe that lower tax rates will improve economic activity and even increase tax revenue – if individuals have more money each month they are likely to spend it, putting it back into the economy. Those that are less optimistic warn that lower rates will decrease tax revenue and increase the deficit.

These tax reforms will reflect the biggest overhaul of the US tax system since the Reagan era if voted in, but Trump won’t have an easy ride; many Democrats won’t vote for reforms that are skewed to the rich and many Republicans won’t want to introduce cuts that will increase the deficit.

Will Trump’s tax plans work? It’s too early to tell; especially as they still have to be voted on. This is going to be a long process, even the administration has admitted that these reforms could take longer than the healthcare bill to implement. If Trump and his team can actually create a tax plan that reduces tax and simplifies the system, there’s a chance it could boost the American economy. If we can ride that wave too, all the better.

¹Tax Foundation

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