A taxing debate and a vexing issue

Washington

DEPENDING on the views of the economic analyst whose newspaper column you have just read or that political pundit pontificating on television, you may conclude that the most significant overhaul of the US tax code which was approved by Congress last week would usher in an era of unprecedented economic growth in America and ensure that President Donald Trump would be re-elected in 2020.

Or you may determine that the passage of the US$1.5 trillion tax cut advanced by the White House and the congressional Republicans would balloon the national debt, produce inflationary pressures, and worsen economic conditions in the long run, and guarantee that three years from now, the current White House occupant would not return for another term in office.

Indeed, as the legendary baseball manager Yogi Berra put it, "it's tough to make predictions, especially about the future". Just browse through old newspaper clips, and you will discover experts forecasting that president Ronald Reagan's policies would bring about America's economic ruin, or that presidents George W Bush and Barack Obama would serve only one term in office. For sure.

A WIN AT LAST

And let us not forget that almost all of America's pundits had predicted that Candidate Trump would never be elected as president. Only someone who did not understand how America works would believe that that buffoon would be sitting in the Oval Office for the next four years.

Well, trying to be fair and objective in the case of the seeping tax measure that Congress delivered on Wednesday, even leading members of the anti-Trump "resistance" would have to admit that the Republican president and his congressional allies achieved a YUGE political victory last week.

After a messy first year in office - that included the failure to repeal his predecessor's healthcare insurance programme aka Obamacare and other legislative missteps, not to mention the political and personal scandals swarming around the White House - Mr Trump succeeded in unifying his party which seemed to be politically divided and turning against him, and in fulfilling a major campaign promise. That makes him look like a winner on the eve of 2018, at least for a few days, and despite public opinion polls that indicate that close to 60 percent of Americans disapprove of his performance.

As the White House and Republican lawmakers see it, the passage of the largest overhaul of the US tax system since 1986, would prove to be a political turning point since it would not only provide tax cuts to 80 per cent of households next year, with many workers seeing bigger pay cheques and reduced tax withholdings in February, but would also accelerate the current economic recovery, creating new jobs, and raising the Dow Jones to the stratosphere.

By 2020 many American voters may still consider Mr Trump to be too boorish, especially when it comes to his silly tweets, but when they open their monthly 401(k) reports informing them that the amount of money in their pensions has quadrupled in the last four years, and that they could pay for their kids' college tuition and retire sooner than expected, they would probably refrain from voting for political change. Let the good times roll!

But whether those economic forecasts would prove to be accurate depends on so many factors, many of them unforeseen or "if" this or that, that even economic and political forecasters with proven records would not be able to assess at this point.

Much of the optimism among Republicans reflect their reliance on their traditional economic theories that assume that tax cuts, and especially for small and big businesses, would spur economic growth, increasing investment, raising wages and creating more jobs for many Americans.

At the centre of the plan would be a large and permanent cut to the corporate tax, lowering the rate to 21 per cent from 35 per cent, that according to many economists should make the US economy and businesses more competitive on the global stage.

At the same time, the tax reform bill also includes new tax breaks for small businesses and temporary tax cuts to individual income tax at all levels, which combined with the rollback in regulations on businesses, would create an economic environment in which investment and hiring would surge and middle-class Americans would have more money to spend.

The American economy that grew at an annual rate of 3.3 per cent in the third quarter of 2017 would grow at a higher pace, hitting 4 per cent growth next year, according to the White House and the Republican leadership. That would create a sense of "It is Morning Again in America", not unlike the national mood following the massive tax cuts introduced by Mr Reagan in the 1980s.

A reminder: Mr Reagan, who was once seen as a "joke" by the press, was re-elected by a landslide in 1984, winning 49 of the 50 states, while his Democratic challenger, former vice-president Walter Mondale carried only the District of Columbia and his own state of Minnesota.

But then the economic and political conditions in the 1980s were very different than they are today, and even in the case of Reaganomics, the tax cuts that were passed at that time ended up expanding the national debt and did not "pay for themselves", as the Republicans suggested then and now, requiring tax increases in the ensuing years, especially if the economy does not grow at the pace projected by the Republicans.

Indeed, in contrast to the rosy White House economic forecasts, most mainstream economists are predicting only a modest boost to economic growth in the wake of the tax overhaul while projecting that under the legislation, debt would continue rising as a share of GDP in the coming years.

And if deficits do rise sharply in the coming years, Mr Trump may have no choice but to abandon his campaign pledge "not to touch" the social-economic programmes that provide assistance to ageing middle class Americans. That could confront him with a major political dilemma as he and his party prepare for the 2018 midterm congressional election and later for the 2020 presidential race.

PRO AND CON

After all, Mr Trump was not elected in 2016 to make America great for its big corporations and its wealthiest citizens, but to assist the "forgotten men and women", the economically struggling blue-collar workers who reside in the de-industrialised sections of Ohio, Pennsylvania, and Michigan who continue to be dependent on the social-economic programmes that would be gutted in order to cut the rising deficits.

The Trumpists respond that these lower middle-class Americans would benefit from the tax overhaul because the big companies that would see their profits grow, would invest in the American economy and create jobs for residents of the Rust Belt, although they concede that these businesses may decide instead to use their rising revenues to reward their shareholders.

The political bottom line is that the Democrats could be in a position during the 2018 and 2020 elections to try convince voters that the tax overhaul was a 2017 Christmas gift for wealthy Americans and that Mr Trump conned those blue-collar workers in 2016 when he pledged to place their interests at the centre of his agenda. Or, as a leading Democrat, Representative Nancy Pelosi from California, put it, the tax bill reflected "the greed of those with power, the cruelty that is in the heart of the scam".

But the Republicans point to the decisions announced by major corporations, like AT&T and Boeing, following the passage of the tax bill, to reinvest in their operations, pay bonuses to their workers and raise their salaries, suggesting that Americans are going to reward the political party that they would see as responsible for their improved economic conditions in November 2018.