On Tuesday, November 29th, GU Politics hosted a panel to discuss the politics of tax policy, in partnership with EY. The panel was moderated by Joe Perticone, Politics Reporter at Business Insider, and included Cathy Koch (Americas Tax Policy Leader, EY; Advisory Board Member, GU Politics), Tony Sayegh (Treasury Assistant Secretary of Public Affairs; Spring '17 Fellow, GU Politics), and Grover Norquist (President, Americans for Tax Reform; Spring '17 Fellow, GU Politics).
One of the ideas the panelists expressed was that tax reform should not be polarized or partisan, but instead a way for Americans to work together in order to improve growth in the U.S. economy. President Kennedy cut taxes to spur Aggregate Demand, creating more output and lowering unemployment because of an increase in consumer spending. President Reagan had the largest tax reform in order to cut taxes on larger corporations so that they had the ability to produce more output and create more jobs. His plan also contracted inflation. This new tax policy will be the largest since President Reagan’s, and it will focus on large economic growth.
All three panelists said that 95% of American use some sort of aid when calculating their taxes, and that the method needs to become simpler. The way it works is quite similar to Reagan’s idea of a tax plan. The House and Senate tax plans differ on various levels, but overall, they both work to increase output and lower unemployment. By lowering the tax on large corporations from 35% to 20%, corporations will be able to produce more output, leading to more jobs in the economy. This 35% rate is supposedly significantly higher than the tax rate in other industrialized countries, and attention should be paid on the fact that lowering this tax does not only help corporate titans but also anyone involved under the corporate umbrella.
However, according to the CBO, the plan will increase the deficit by $1.7 trillion by the end of the decade. It removes interest deduction on student loans and essential interest deduction on income tax from mortgage loans. While the panelists did not have answers to the issue regarding the deficit, Norquist mentioned that this plan helps those coming from $0 to $35,000 a year. The first $24,000 will not be taxed and the rest of the income goes down to approximately 12% tax. This still does not solve the issue of a struggling middle class. A country is well-off when it middle class thrives. All three panelists mentioned that tax cuts for the middle class are essential, and there has been a push in the past for making these permanent.
Furthermore, an interesting result of a tax cut like this is that the unemployment rate goes up. The reason this happens can be attributed to the tax cut. With a tax cut, people have more of their marginal income since less of it is taxed. Because of this effect, more workers will be motivated to join the workforce again and search for a job. In reality, unemployment is actually around 8%, but the rate does not portray this well. The unemployment rate only measures people unemployed who actively search for work. Once someone becomes a discouraged worker and leaves the labor force, this person is not accounted for. Thus, the unemployment rate makes our economy’s situation look better than it actually is.
Lastly, what this tax will do is to bring more firms back into the United States. With lower tax rates, more capital will flow back into the U.S. In the past, foreigners have bought companies in the U.S., but now with lower tax rates, there will be more of an incentive to move firms to operate in the U.S. In the past, these firms left in order to receive better tax treatment. More Foreign Direct Investment and Foreign Portfolio Investment will result as a change in the tax code.
A question was also raised on the effects of the tax on certain states since habitants of each state pay a state combined with a federal tax. What happens to states like New York and California? Norquist stated with confidence that these states hurt their own people because of their higher estate and marginal tax. They choose to be donor states and have too high of local and state taxes.
To conclude, this tax plan seems to have a lot of benefits, but it very well has many drawbacks. According to the panelists, there is a 95% chance the bill will pass the Senate floor. We shall see the result soon.