Critics of the tax overhaul President Trump signed at the end of 2017 think it’s a disaster.
It’s not. The Trump tax plan lowers the U.S. corporate tax rate from 35% to 21%, putting it in line with other developed nations that have been cutting their own business rates for years. Many economists have been calling for such a move for a long time.
The Trump plan will also modestly lower taxes on millions of middle-class families, giving them a few more bucks to spend. Even economists who don’t like the plan think it will boost economic growth a bit in 2018 and 2019.
The problem is that Republicans kicked many problems down the road instead of addressing them as part of the biggest tax overhaul since the 1980s. They may also have created new problems by passing massive tax cuts without coming up with new revenue to offset the cost. Here are 6 things we’ll learn to hate about the Trump tax cuts:
1. Worsening income inequality. Tax cuts for the wealthy will be much larger than tax cuts for lower-income workers, in both dollar and percentage terms. Yes, supply-siders: it’s true that the wealthy pay more taxes in the first place, so they should save more when tax rates decline. But their tax payments will also drop by more in percentage terms than lower- or middle-income taxpayers, which will put even more money in the pockets of those who need it least. The wealthy will also benefit most from cuts in the corporate tax, which will inflate stock prices and returns for those lucky enough to own stocks.
Some income inequality is essential, because it creates powerful rewards for working hard and getting ahead. But wealth is increasingly loaded at the top of the income chain, while the middle is hollowing out. Smart policy would push income inequality back toward historical norms. The Trump tax cuts will have the opposite effect, making the rich richer still, and the rest more resentful. That will have ugly consequences.
2. More tax games. Many private business owners will get a new break that lets them deduct 20% of their income, effectively lowering their tax bill well below what they’d pay if their income were taxed as regular wages. So more people are likely to change their reporting status, stretching the definition of what a business really is. This comes as funding and staffing at the IRS are both down, due to hostility toward the agency from Congressional Republicans who fund it. The inevitable outcome seems to be a surge in tax cheating and a growing sense among honest taxpayers that the system is rigged in favor of cheaters. True tax reform would make the system more fair. But it is now arguably less fair.