U.S. President Donald Trump speaks at the start of a press conference with members of the coronavirus task force, including Vice President Mike Pence, on February 26, 2020. (Tasos Katopodis/Getty Images)
The economy was one of their top issues when voters went to the polls this year. So what does Donald Trump’s return to the White House – and Republican gains in Congress – mean for the US economy?
I have been following the elections closely, with great interest in the economic plans of each candidate. I believe there are two key areas in particular where Trump’s victory could bring economic benefits over the next four years. But there are also costs that must be paid.
Extension of Trump’s 2017 tax law
Let’s start with taxes.
Nearly all provisions of the Tax Cuts and Jobs Act of 2017, which Congress passed and Trump signed into law in his first year in office, are set to expire at the end of 2025. If those parts of the law are not extended, it would result in a tax increase of about $4 trillion through 2034. This would impose an additional burden on households emerging from a period of high inflation that has created significant hardship for many families – and contributed to Trump’s victory.
Extending individual income tax cuts would prevent marginal tax rates from rising and—rather than letting them expire—lead to an increase in economic output in the long run. This is because lower taxes increase demand for goods and services in the short term. Lower tax rates increase the incentive to work, save and invest, which in the long run leads to more hours worked, more capital, higher labor productivity and new business creation.
The law also improved tax simplicity by doubling the standard deduction. And it promoted fairness by increasing the child tax credit, reducing the number of taxpayers subject to the alternative minimum tax and limiting deductions on state and local income taxes. Expiration of these provisions would result in a significant increase in the tax burden for many lower- and middle-income households.
Given that Trump signed the law into law in 2017, I think it’s a good bet that he will at least expand the law, which will be much easier with a Republican Congress. Many economists would argue that this will be good news for American households and the economy as a whole.
Removing even more administrative burden
More importantly, I think, is what I expect will be his more business-related policies that should promote innovation, investment and productivity, many of which also relate to the 2017 tax law.
Some of these policies also concern the same tax code – and so will most likely be expanded or reformed early in Trump’s second term. Two provisions that will soon expire are the 20% deduction for small businesses and a measure that allows for the costs of equipment such as computers and production machines.
The small business deduction, which allows owners to deduct up to 20% of their share of business income from their individual tax bills, was found to increase employment by 1.2 million jobs per year. It is also important to ensure that small businesses can remain competitive with larger competitors. Allowing companies to fully bear the cost of equipment has been found to increase economic output by about 5% in the long run.
It is important to expand these provisions to avoid a large tax increase on small businesses, which would reduce job creation and innovation and lead to slower growth and lower living standards.
A related issue is the accountability of research and development expenditures. The 2017 tax law actually increased taxes on corporations by requiring these expenses to be spread over five years, which increases the cost of capital and discourages investment. Trump has said he would change this so that all expenses, including R&D, could be included in costs immediately. This should promote economic growth.
More broadly, Trump’s first term was marked by a reduction in red tape, as regulatory reform was a major focus of his administration. Research on the economic costs of new regulations shows that the additional regulatory burden during the Trump administration was significantly lower than during the administrations of George W. Bush, Barack Obama and Joe Biden.
Research shows that the US economy continues to be stifled by heavy-handed and poorly targeted regulations that slow growth and innovation. Trump has pledged to further reduce regulations during a second term, which could lead to solid gains in economic output.
Given the promise of artificial intelligence to increase productivity and growth in the near future, I believe it is more important than ever to ensure that government agencies set the rules of the game in a fair and efficient manner, without sacrificing the economic benefits of increased undermine the economy. innovation.
Compensating the costs
But there is one major caveat to this. Extending these tax cuts will put severe pressure on the national debt, which is currently at unsustainable levels.
Since the turn of the century, the U.S. debt has risen from $10 trillion to over $35 trillion, and the Congressional Budget Office predicts that debt as a percentage of GDP will increase from 99% in 2024 to 166% in 2054.
Reforming the tax code to prevent a significant tax increase is important, but offsetting the revenue loss with spending cuts will be critical to prevent debt from growing even higher. Failure to do so would significantly increase the budget deficit and national debt, putting the country’s finances on an even more precarious path.
But Trump could go further than just finding compensation. The start of the new administration is, in my opinion, the perfect time to create a new budget committee to initiate a bipartisan conversation on sustainable solutions to fiscal policy.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
John Diamond is the Edward A. and Hermena Hancock Kelly Fellow in Public Finance and director of the Baker Institute’s Center for Public Finance, adjunct professor of economics at Rice University, and CEO of Tax Policy Advisers. Through its opinion section, Kansas Reflector works to amplify the voices of people who are affected by public policy or excluded from public debate. Find information here, including how to submit your own comments.
SUBSCRIBE: GET THE MORNING HEADLINES IN YOUR INBOX
