Donald Trump’s corporation tax cut is straight out of the Ronald Reagan playbook. According to the current occupant of the White House, the reduction from 35% to 15% will pay for itself because US companies will invest more.
The argument is that higher levels of investment will raise the growth rate and, in turn, raise corporate profits. Consequently, the tax take will be no different at 15% than it was at 35%.
George HW Bush had a description for this approach when Reagan first floated it during the 1980 election campaign. He called it voodoo economics, which is was it turned out to be. Reagan’s tax cuts and higher defence spending were certainly accompanied by higher growth but they did not pay for themselves. Far from it. The US ran high budget deficits and the national debt spiralled.
Viraj Patel, of ING bank, said Trump’s tax arithmetic is wishful thinking and unlikely to impress the deficit hawks on Capitol Hill. “If it were that easy, everyone would do it,” he said. “Though some positive effect on short-term growth is possible from tax cuts, this is likely to be inadequate to boost revenues to outweigh the costs.”
In the end, Trump will only get his corporate tax cut implemented with the agreement of Congress. Both Republicans and Democrats will want to know how the president intends to make up for the loss of revenue that a cut of this magnitude will cause. On current projections, the US government expects the tax take from corporation tax to double from $290bn (£226bn) a year in 2016 to $580bn by 2020.
Trump has also promised personal tax cuts, which will further add to the deficit. So one of three things is going to happen: first, Trump’s plan may indeed lead to a doubling of the US growth rate and be self-funding, although recent economic history suggests otherwise.
Second, the president will have to find cuts in spending to balance the loss of tax revenue. The proposal to boost investment in America’s infrastructure would look highly vulnerable in those circumstances.
Finally, Congress could decide that the plan is simply too flaky and refuse to pass it.
