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  • Abiye Alamina

Tax Reform: A back of envelope analysis

The Trump Administration seeks to reform tax policy by making it simple, easy to file, and less of a tax burden on the middle class. The House has recently passed a Tax reform bill and Senate is set to attempt to pass the one that cleared the Finance Committee this week. The three important questions I ask are:

1. What is the true cost of tax reform?

2. Do the bills in their current form achieve the intended objective on face value?

3. What exactly does economics project will be the impacts of either bill ultimately becoming law?

I address each of these questions in subsequent blogs, but the summary is presented here.

First, the cost of tax reform intended to achieve the aforementioned objectives is seen in the form of explicit economic costs - mounting deficits, political costs - due to the elimination of benefits, and social costs - from societal level readjustments to the incentives introduced. Tax Reform is limited by the ability to trade these costs against each other in the context of both the present and the future.

Second, ultimately a single bill will have to be passed by both houses, having been hammered through both going into conference. Juxtaposing both bills against the status quo, the House and Senate bills do indeed achieve most of their intended objectives. With the exception of a few who may find that their tax liabilities do go up under both proposals, the majority do experience lower marginal tax rates on income. Businesses would also now face lower statutory tax rates and also be provided with other incentives that allow them for the most part to experience enormous tax relief as intended by the Tax Reform.

Finally, there are competing economic ideas on what to expect from the tax reform. The presumption is that there would be faster economic growth from these measures over time, so that at the end of 10 years, we might end up with a surplus or a balanced budget at least. This is based in large part on supply side economic predictions. There are however equally plausible economic arguments that might suggest otherwise. It is more likely that yearly deficits will increase and while there will be spending growth, it may not translate to wage growth for the middle and lower class income earners at worst and at best any jobs and output growth may only be modest.

More detailed look at these three questions are addressed in separate blog posts which you can find labeled as Parts I, II and III of the Tax Reform Series.


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