Is Trump's Tax Reform Trickle-Down Economics Part Two?

Trump’s latest suggested tax reforms would provide massive benefits to the ultra-wealthy and major business owners of the country, while providing modest benefits to middle-class and lower-class taxpayers. The philosophy behind the plan is a variation of “trickle-down” economics, which predicts that benefits for major businesses would increase hiring and economic growth, but is this a real variation of the original trickle-down economics plan that was the hallmark of Reagan’s presidency? And either way, can this work to bring economic growth to the nation?

Trump’s New Tax Reform

Trump’s new tax plan isn’t yet a complete piece of legislation, but the basics are already outlined. The most noticeable part of the plan is an intention to radically slash corporate taxes in several different forms, including a complete exemption of income earned overseas. Additionally, the plan would shrink the complexities of current individual tax rates to three to four major brackets (there are currently seven), and would expand both the standard tax deduction and child tax credits for all individuals in the United States.

The plan bears much similarity to the “Better Way” tax proposal, which was introduced in 2016 by House Republicans. Though its stated intention was to increase spending power of the middle class, the benefits of families making between $50,000 and $75,000 would amount to an increase of about 0.5 percent, or $270 per year. Plus, by 2025, about 99.6 percent of the plan’s benefits would be distributed to the top 1 percent of earners, with the intended effect being a “trickle down” of benefits, with more job opportunities, entrepreneurship opportunities, and economic growth for everyone.

There’s still much to be debated and decided. House Republicans are currently drafting a piece of tax legislation that draws on both the Better Way proposal and Trump’s recommended tax changes. The current draft of the legislation outlines tax brackets of 12, 25, and 35 percent, with a standard deduction nearly doubling to $24,000. The corporate tax rate would also be lowered from 35 percent to 20 percent, and the alternative minimum tax, which increases taxes for some upper-class individuals, would also be repealed.

Chances of Getting Passed

So will this new tax legislation be passed? It’s hard to say, since so many things still need to be decided. Individual tax bracket thresholds still need to be worked out, and it’s uncertain how much interest deductibility will be limited or whether there will be a fourth bracket for people making more than $410,000 a year. With the majority of Republicans trying to make the plan feasible and back it, there’s a good chance it could be passed, but almost all Democrats will likely attempt to obstruct the bill from becoming law.

The Merits of Trickle-Down Economics

There are some merits to trickle-down economics. To provide more opportunities to individuals struggling with debts and limited income, direct benefits aren’t always the best solution. Short-term fixes, like declaring bankruptcy or providing government handouts can temporarily relieve the problem, but it doesn’t necessarily create more jobs.

The original variation of trickle-down economics came from the Reagan administration back in the 1980s. The top tax rate was slashed significantly, from 70 percent to 28 percent, and the plan allowed for far more business deductions. During Reagan’s two terms as president, 16 million jobs were created, and most of the years of his presidency were marked with economic growth, including a whopping 7.3 percent increase in 1984.

However, it’s not clear that these tax cuts were directly responsible for job creation and economic growth; some argue that Reagan’s increased defense spending may have contributed, and by the end of his presidency, the national debt had skyrocketed. Conversely, Clinton’s presidency came with an increase in corporate taxes, and ended up creating even more jobs.

Still, there’s some limited evidence that trickle-down economics can work, if it’s coupled with a reasonable government spending plan, and a mechanism to control inflation.

Why Trump’s Plan Falls Short

Assume, for a moment, that trickle-down economics is the best way to grow the economy. Trump’s plan still falls short of that goal for a few main reasons:

  • The middle class is almost totally neglected. Trickle-down economics should favor business owners and job creators, but it also needs to give some support to the middle class. Trump’s plan almost completely neglects these American taxpayers.
  • Shareholders aren’t necessarily job creators. Corporate shareholders tend to benefit tremendously from this increased profitability, but shareholders tend to be ultra-wealthy, and aren’t necessarily job creators.
  • There’s no supplementary plan. Trump’s policy isn’t accompanied by a radical decrease in government spending, nor is there a supplementary plan to deal with inflation and unrestricted economic growth.

Trump’s plan isn’t the worst tax model that’s ever been considered, but it isn’t the powerful job creator or economic driver that it’s heralded to be. It may serve as a first draft for something better, but for now, Trump’s trickle-down economic policies are too unpredictable and too undefined to stand on their own.