Three lies about Trump’s tax plan

Trump says the giveaway will create economic growth. There’s just no evidence to back that up.

So far Donald Trump has done a lot of things we’d never thought the Leader of the Free World would do.

Trump uses Twitter for megaphone diplomacy, labels checkable facts ‘fake news’ like we’re in a George Orwell novel, and publicly scoffs his own ministers.

Not everything he does is unpredictable, though.

The richest government in US history cutting taxes for the wealthy and business is one thing we could see coming a mile off.

It’s easy scoring with his voters, who believe in trickle-down economics. That fanciful idea where you give the rich more money and it somehow leads to everyone being better off.

This big idea is of course hardly original.

Tax cuts have been the centrepiece of various Republican governments. Ronald Reagan and George W. Bush bought into the trickle-down philosophy too.

Decades on, the glass at the top still can’t be seen to spill anything. Meanwhile the glasses on which it is resting aren’t even damp yet.

Trump defends the 1.5-trillion-dollar giveaway by saying it’ll create economic growth. Only problem is there’s no evidence to suggest that it will.

Here are three lies about Trump’s grand tax reform.

It won’t create more jobs or higher wages

Almost a year into his Presidency, Donald Trump is finding it difficult to put his campaign promises into practice.

Construction companies are still eagerly waiting on the green light to start building a wall on the US border with Mexico.

The Affordable Care Act – better known as Obamacare – has been a thorn in Republicans’ side from its inception. But even with a majority in Congress, Trump couldn’t repeal it.

That leaves a third big idea: tax reform. Trump kind of needs this one to actually come off.

“We’ll cut business taxes massively,” candidate Trump promised last year. “They’re going to start hiring people.”

White House Economics Adviser Gary Cohn told Trump big CEOs are excited about the tax plan. That doesn’t surprise me.

Where the White House says the measure will create ‘more jobs’, CEOs will only hear ‘higher profits’.

Trump’s government suggests there’s a direct link between lower corporate taxes and higher wages for working people.

But…

“This argument fundamentally disregards everything we know about how companies actually decide to hire and how much to pay their employees,” writes former CEO of Brightcove David Mendels on LinkedIn.  

Corporate tax cuts aren’t a magic formula for more jobs and higher wages.

If the past decade has taught us anything, it’s that most of these extra profits end up in the hands of executives (bigger bonuses) and investors (stock buybacks and higher dividends).

“As a CEO and member of the Board of Directors at a public company, I can tell you that if we had an increase in profitability we would have been delighted but it would not lead in and of itself to more hiring or an increase in wages.

“We would hire more people if we saw growing demand for our products and services. We would raise salaries if that is what it took to hire and retain great people. But if we had a tax cut that led to higher profits absent those factors, we would ‘pocket it’ for our investors.”

Trump’s tax reform is not going to give working people a pay rise. It’ll only serve to line the pockets of the rich.

It won’t “recover” money

Slashing corporate tax doesn’t give companies a reason to hire more people. If there’s no more demand for their products, they’re not going to produce more.

What would create more demand?

Well, instead of adding more wealth to the top and wait for it to miraculously “trickle down”, you could cut out the middle man.

Put more money into the hands of people who are more likely to spend that extra money. It’ll have a much bigger impact on the economy than letting top incomes hoard even more money.

Trump further assumes lower taxes will bring back the trillions that companies keep offshore.

The US government misses out on an estimated $70 billion a year because companies are able to move their profits to tax havens. About 20% of all corporate tax the US does collect.

Here’s the thing: even in countries with lower tax rates big business comes up with constructions to pay even less.

Rather than lure companies back with lower taxes, the US government might want to step up its fight against tax evasion.

Real tax reform would be if the government closed the loopholes through which companies keep money away from the taxman.

If the government were able to collect tax revenue more efficiently, then some of this money might be used to lower the rate.

But this is not what Trump’s tax legislation does. All it does is cut the rates.

Unless the rate cuts are paired with a crackdown on corporate tax evasion, there’s no way all that money will flow back into the Treasury’s coffers.

It won’t cure the US economy

It’s not just that the tax reform might be ineffective in bringing about economic growth. It could be actively harmful to the US economy.

The tax freebie will blow another big hole in US public sector spending.

$1.5 trillion over the next ten years to be exact. Keep in mind the US government already has problems bringing its spending under control. It almost shut down this year.

“We will get higher deficits but little additional growth,” Patrick Watson predicts in Forbes.

“The tax cuts will flow to asset owners and shareholders, probably blowing the market bubble even bigger. That will make the inevitable breakdown even more painful.”

That’s another thing. If the tax cuts lead to more money for investors, chances are it’ll push stocks even higher.

Stock markets are already at very high levels. At some point that bubble will burst and all that extra money will make a market crash worse.

In this sense Trump has mistaken the disease for the cure. His antidote might worsen rather than improve the health of the US economy.

So don’t expect the tax reform to achieve the promised economic growth. More likely is it’ll result in more wealth flowing upwards, more inequality, a bigger deficit, and a more painful crash.

Something to keep in mind in case Chancellor Philip Hammond still thinks cutting corporate taxes further could be the magic solution for post-Brexit Britain.

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