Presidential Candidate Tax policy Proposal.
Donald Trump is the current leading presidential polls candidate and has proposed changes in the tax policy. Central to his reform plan is the significant reduction in marginal taxes for individuals as well as businesses as stated by Trump (2015). The fiscal policy change will consequently increase the standard deduction sums to as much as four times over the current standards; subsequently, the policy will limit or revoke some of the tax expenditures. Other consequences of the policy include the repealing of personal and commercial alternative nominal tax rates as well as the estate and gift tax.
Trump's policy on taxes will have hugely varied macroeconomics and microeconomics effects as significant cuts are expected from the numerous tax deductions. The revenue loss would mostly emanate from individual tax cuts while a considerable percentage of taxes will be lost as a result of massive corporate reductions in income tax rates and the reintroduction of new rates on businesses. Taxes would be significantly reduced at all income levels, but the biggest beneficiaries would be high-income taxpayers who would receive a massive cut on income percentages and dollar items. After-tax income would be reduced by close to 7% on average. The highest income taxpayers would receive on average a tax cut of close to 19% after tax income. Middle-income homes will ominously get average tax cuts of 4.9%after tax income.
Several economic effects are expected as a result of the proposed policy changes and include the impacts on savings. After-tax returns on savers will substantially increase due to the significant changes in reductions in tax rates for corporate bodies and business profits. Upon critical analysis of Trumps policy change complexities will be found as the increase in the significant decrease and limitation of most tax expenditures will undoubtedly reduce the occurrence of record-keeping and reporting. Another bottleneck for the policy plan is the likelihood of wage earners shifting to become independent contractors to benefit from the incentivised rates of business income. The tendency of such a scenario occurring will most probably require the formulation of laws to prevent such occurrences. Impact on the supply of labour is noteworthy as effective tax rates on income for laborers will be reduced by an average of 7.6%. Tax rate falls should probably appeal more to workers to work less as consumption goals can easily be met through higher pay as a result of cuts in taxes. According to Romer (2007) economic effects of the fiscal policy include more investments, savings and work. Consumption needs can also be met which may include retirement savings and college tuition fees. Proposed policy may also cause increased federal borrowing or spending cuts. Trump's policy would require a massive freeze on spending in which the unlikelihood of such a move will increase national debt that is already high.
According to Hall and Jorgenson (1967) marginal cut in the tax rates will improve incentives to perform, invest, and savings if the rates of interest are not altered. Changes in the tax plans will also lead to a significant reduction in tax distortions in capital allocation. A primary shortfall, however, will be the increase in borrowings by the government as interest rates will be elevated and private investors face the risk of being crowded out as this may bear the risk of unbalancing the policies incentives effects that are very positive. Such a policy, however, would require the new administration to reduce primarily federal spending to help offset such a huge loss in revenue.
References.
Hall, R. E., & Jorgenson, D. W. (1967). Tax policy and investment behavior.The American Economic Review, 57(3), 391-414.
Ontheissues.org,. (2016). Donald Trump on Tax Reform. Retrieved 21 February 2016, from http://www.ontheissues.org/Celeb/Donald_Trump_Tax_Reform.html.
Romer, C. D., & Romer, D. H. (2007). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks (No. w13264). National Bureau of Economic Research.
