Tax Cuts

The practice of lowering the rate at which the government charges taxes is known as taxation. Despite widespread criticism from various sectors of the economy, the process's principal goal is to reduce the federal government's real income while raising income rates for the general population, whose tax rates have been reduced (Showstack 3). Politicians have advocated to have their tax credits as tax reduction as a result of the alleged benefits of rising real incomes among various taxpayers. In the general principle of the tax cuts, it has been identified that its effects cannot be easily predicted since they are largely influenced by the manner in which the taxpayers utilize their additional income and how the government can easily adjust to its reduced incomes (Zidar 132). Reductions in the income tax rates have the ability in influencing the behavior of the individuals and businesses through both the income and substitution effects.

According to the studies conducted on the impact of the tax cut on the economic growth, it was established that even though there is no any doubt that different tax policies such as tax cut have the ability of influencing the economic choices in the United States of America, it is by no means obvious, on an ex-ante basis, that the tax rate cut will go automatically to the creation of a larger economy (Avi-Yonah, Reuven and Mazzoni 15). This is based on the fact that in most cases, this policy always favors the rich at the expense of the poor in the economy. There are different policies such the Trump tax plan and trickledown economics which have proposed for the tax cuts in order to benefit the economy, but that has not yet been achieved (Thompson 888).

The emergence of the federal budget surpluses has led to the creation of the needs for the large-scale tax cuts, a process which has been considered to be irresponsible and counterproductive. The optimistic assumptions related to revenues and spending have created the formation of surpluses over the next ten years. Even though the government has the ability to materialize on the surpluses, it is evidently clear that the surpluses will only exist in a situation whereby the government accounting takes control of the growing cost of the future liabilities (Zidar 130).

The current economic situation is a clear indication that the government is faced with large and long-term deficits which can be solved by the implementation of tax cut policies since it would just make the situation worse (Showstack 13). For example, the proposed 10% cut in the income tax rate has been observed to provide large benefits to the wealthy households and very little to those households with low incomes.

In that case, it can be said that this policy will have very minimal effects on the economic growth, but instead, it would create heavy burdens on the coming generations (Showstack 15). This scenario has therefore been predicted to cause a reduction in the future budget disciplines since many of the citizens of the United States of America will be able to violate the budget rules. In addition, the case of tax burdens for most of the families are already at their lowest levels in twenty years (Zidar 144). It therefore important for the federal government to realize that the process of saving the surplus through the process of paying down the public debt would boost the economic growth at a more reliable and faster rate as compared to the tax cut policies. The direct examination of the proposed 10% cut is associated with additional problems in the economy (Gale and Samwick 12).

The process of implementing the tax cut policy has been estimated to cost $200 billion from the Social Security Trust Funds. This would lead to a great violation of the general agreement which was put in place to ensure that there is the preservation of those funds for the retirees in future (Mertens and Ravn 1240). The case of the tax cut is further weakened based on the fact that the families which are involved at most points during the process of the income distribution will have to pay a smaller share of their income in the federal taxes in 1999 as compared to any time in the coming twenty to thirty years (Ferede and Dahlby 588).

The Trump Tax Plan, just like many economic scholars have argued, will help the business sector more than the individual families. This is based on the fact that by 2027, there would an overly lower business taxes while those at individual levels would be higher since they will be increasing at every income level annually until 2027 (Avi-Yonah, Reuven and Mazzoni 19). Even though the tax plan is also supposed to help the individual families, it is clear that the Trump Tax Plan would help the families with higher income rates in the expense of the middle class and low-income earners. According to the plan, everyone will be able to get a tax cut by 2019. The situation would after that change in 2021 since there will be an increase in the tax rates for those individuals who would be earning $30,000 and below per year. In two years later, 2023, there will be a further increase in tax rates for those individuals who earn less than $40,000 per year.

Based on the fact that the tax cut will expire in 2025, all income levels will, therefore, have to pay higher taxes in 2017 (Showstack 9). According to the analysis done by the Joint Committee on Taxation, the increase in tax rates will be as a result of the loss of deductions. The findings of the Tax Policy Center stated that those taxpayers who will be earning in the top 1 percent would have larger percentage on the tax cut as compared to their counterparts who are in low-income levels (Avi-Yonah, Reuven and Mazzoni 20). As a result of this, it can be said that by 2027, those who are in the lowest 20% would have to pay higher taxes. There would be a further disadvantage on the middle-class households since they will have to pay higher taxes by 2027.

It is therefore evidently clear that the Trump Tax Plan will not help the middle-class and low-income earning families since more than 70 million America citizens do not always make enough to be able to pay taxes (Thompson 891). The plans will not also have any help to the third of the taxpayers will income falling below the current standard deduction and personal exemptions. Furthermore, different forms of tax breaks such as the non-child defendants, have the probability of ending after five years, but there are still considerations to extend the plan even after its expiry, hence adding more to the national debt. An increase in the national debt dampens the economic growth in the long run (Showstack 5).

One of the failed tax cut policy is the trickle-down economics which was not able to be successful because of various reason such as cutting the top tax rate could not lead to income growth, economic growth, wage growth and creation of jobs (Mertens and Ravn 1230). Different studies conducted on the American economy have shown that the process of cutting the taxes for the rich people in the economy does not have any improvement on the economic standing for the middle and lower-class earners or at times for the whole nation (Akinci 138). To be precise, it has been identified that the examination of the economic indicators as examined in various reports were dependent on a variety of different factors but not only on the tax policies. The perceptions of the trickledown economies that the economic growth would be realized through such development did not work as expected since there was not the clear implementation plan (Prakash 448).

The assumption made by the trickle-down economies was based on the fact that the investors, savers and the owners of the company are considered as the main drivers of the economic growth. It further assumes that they will utilize the extra cash from collected from the tax cuts to expand their business and hence ensuring that there is economic growth (Avi-Yonah, Reuven and Mazzoni 14). The trickle-down economies was observed to increase the spending of the government by 2.5% per year. This effect almost resulted in a tripled federal debt. The debt was observed to have grown from $997 billion in 1981 to $2.85 trillion seven years later. The trickle-down economies was therefore observed as the cause of the massive government spending (Akinci 144).

Even though the trickle-down economics have indicated that the lower tax rates would help people of all income levels, this was not the reality on the ground since it led to further worsening of the income inequality (Gale and Samwick 9). Between 1979 and 2005, there was an increase in the household income tax by 6% for the taxpayers in the bottom fifth. Even though this was a great achievement, but for the people on the top fifth, it was not that great since they experienced an increase in their household income tax rate by 80 percent. In that case, the top 1 percent witnessed their income tripling instead of trickling down, as perceived by the principles of the trickledown economics (Akinci 149).

Like many of the industrialized countries in the world, the United States of America did not start to impose an income tax on the wealthy individuals until the 1990s. Following its introduction, there have been varied rates of taxes. In a situation whereby there is the occurrence of the tax cuts on the wealthy citizens, many of the lawmakers do always perceive that it would lead to great economic growth (Ferede and Dahlby 576).

History about the economic growth of the United States of America has indicated that the tax cut policies does not in most cases positively influence the country’s economic growth. Between 1978 and 1982, the economy of the United States of America experienced a recession which involved the occurrence of two low points (Gale and Orszag 199). The second dip was observed in 182, following the passing of the slew of tax cut by the Congress, during the administration of President Ronald Reagan.

In this plan, there was an inclusion of cutting the top tax rates from 70 percent to 50 percent. In the following year, it was observed that even though the Congress was able to roll back other tax cut policies, there was no significant change in the economic growth towards the positive side. In the second term of President Ronald Reagan, he was able to preside over another key tax rate cut which formed part of the generalized tax reform act. In this submission, there was cutting off the top tax rates to their lowest in the postwar era at 28 percent (Avi-Yonah, Reuven and Mazzoni 17).

The effects of this tax reform act were experienced during the subsequent five years, where the economy was able to experience a small recession during the presidency of George H.W Bush. Following the rolling back of Regan’s tax cut policy by President George H.W Bush, the economy was able to significantly experience a slight increase in the rate of top income earners (Mertens and Ravn 1215). On the same note, President Bill Clinton was able to introduce the first major increase in the top marginal tax rates by 39.8 percent since the 1950s (Ferede and Dahlby 584).

President George Bush was able to implement the application of the tax cut policies in two different packages. With one of the packages being introduced in 2001 while the other one in 2003. On aggregate, both of the two packages were able to cut the top tax rate down to 35 percent (Gale and Orszag 210). Since the Congress was able to pass these two packages through the application of the budget reconciliation, the tax rate cuts were to expire in 2013. Following the full implementation of the tax rate policy, the economy began to decline, even though slowly, before its full crash in 2008.

Even though President Donald Trump has claimed that the rich will not be able to gain at all in his tax cut plan, but it is still clear that the proposal that his administration has put in place back in April 2017 was a clear indication that it would heavily benefit the high-income taxpayers. In most of the cases, the tax policy, tax cuts policy, will always benefit the rich in the society while providing a lot of discrimination to the poor counterparts (Ferede and Dahlby 570). President Trump stated that he was going to cut the corporate tax rates from 35 percent to 15 percent and at the same time lower the individual income taxes. In a mathematical perspective, the rich will save more money than the middle-class earners if the tax cut rates are done across the board.

Some people may think that it would be fair to only cut tax rates for the middle-class earners, but in a real sense, there will be nothing left for such people after the cut is done. Even in the current situation just like before, the middle-class earners have not been contributing much to the total federal tax burden as it is in the current situation (Gale and Orszag 196). A good example was in 2013 when it was found that the middle quintile was able to pay only 4 percent of all the federal income taxes, while their counterparts who are in the top 10 percent of the income earners were able to pay 71 percent of the federal income taxes (Prakash 463).

There are different policies which can be implemented in relation to the tax cut plan in order to become beneficial, not only to the rich in the society but also the middle and working class earners (Thompson 876). One of the important consideration which should be taken into account before finalizing on the formulation and implementation of any tax cut policy is to ensure that the most significant tax cut goes to the middle class earners since they are the people who are likely to spend every dollar which they earn.

This is based on the fact that while the middle class will spend whatever they have earned, the wealthy will, on the other hand, use the tax cuts to save or invest (Prakash 448). In that case, it can be said that the tax cuts policy will help in the stocking of the market but not in the driving of the demand. In that case, it can be justified that there is not much income for the middle-class earners which can be exposed to the tax cut policy.

The cuts on the middle class will help in the creation of more jobs since there will be an economic driving of the demand, which ensure the creation of businesses to meet it. The main reason for the introduction of different forms of tax cut policies by different presidents of the United States of America has been to provide friendly taxation plan for the middle-class earners (Gale and Samwick 7). Unfortunately, this has not been achieved since those tax cut policies have failed to indicate the significance of low taxes of the middle-class earners as compared to the wealthy citizens of the United States of America.

Conclusion

Even though the introduction of the tax cut policy was to provide beneficial effects on the middle-class earners, this has not been the case since the rich have always been favored. The implementation of the tax cut has been considered to be irresponsible and counterproductive. The situation has not been different even with either the trickledown economics or the Trump tax plan since in all of the cases, it has been determined that the rich are always the main beneficiaries. Following the introduction tax cuts in the United States of America, there have been varied rates of taxes.

In a situation whereby there is the occurrence of the tax cuts on the wealthy citizens, many of the lawmakers do always perceive that it would lead to great economic growth. This wrong perception is what led to the great fall of the trickledown economics since there was a belief that if the tax cut is imposed on the rich, they will be able to expand their business and create employment which would lead to economic growth, a situation which never happened as expected. Historically, there are various occurrences which indicated that the tax cut policy resulted in complete failure. In order to ensure that these tax cut policies able to benefit the middle and working class as expected, it is important to ensure that the most significant tax cut goes to the middle class earners since they are the people who are likely to spend every dollar which they earn.

Works Cited

Akinci, Merter. "Inequality And Economic Growth: Trickle-Down Effect Revisited." Development Policy Review, volume 5, no. 2, 2017, pp. 138-153. Wiley-Blackwell.

Avi-Yonah, Reuven S., and Gianluca Mazzoni. "The Trump Tax Reform Plan: Implications for Europe." SSRN Electronic Journal, volume 2, no. 4, 2017, pp. 13-29. Elsevier BV.

Ferede, Ergete, and Bev Dahlby. "The Impact of Tax Cuts on Economic Growth: Evidence from the Canadian Provinces." National Tax Journal, volume 65, no. 3, 2012, pp. 563-594. National Tax Association.

Gale, William G., and Andrew A. Samwick. "Effects of Income Tax Changes on Economic Growth." SSRN Electronic Journal, volume 3, no. 7, 2014, pp. 1-15. Elsevier BV.

Gale, William G., and Peter R. Orszag. "Economic Effects of Making the 2001 and 2003 Tax Cuts Permanent." International Tax and Public Finance, vol 12, no. 2, 2005, pp. 193-232. Springer Nature.

Mertens, Karel, and Morten O Ravn. "The Dynamic Effects Of Personal And Corporate Income Tax Changes In The United States." American Economic Review, volume 103, no. 4, 2013, pp. 1212-1247. American Economic Association.

Prakash, Puneet. "Why Did Non-Dividend Paying Firms Benefit More From The 2003 Dividend Tax Cut? Evidence from Seos." SSRN Electronic Journal, volume 34, no. 15, 2011, pp. 440-489. Elsevier BV.

Showstack, Randy. "Federal Science Funding Drops Sharply In Trump Budget Plan." Eos, volume 5, no. 3, 2017, pp. 1-29. American Geophysical Union (AGU).

Thompson, S. J. "The First Income Tax, Political Arithmetic, and the Measurement of Economic Growth." The Economic History Review, volume 66, no. 3, 2012, pp. 873-894. Wiley-Blackwell.

Zidar, Owen M. "Tax Cuts for Whom? Heterogeneous Macroeconomic Effects of Income & Payroll Tax Changes." SSRN Electronic Journal, volume 13, no. 3, 2012, pp. 128-157. Elsevier BV.