"Kill the bill, don't kill us," were the screams of protesters Wednesday morning in the United States Senate chamber as the Republican tax cut bill was passed. And with those protests, U.S. Congress is on track to send the largest overhaul of the U.S. tax code desk in over three decades to the president's. Although an American tax bill, the implications of this reform of U.S. tax laws will impact nearly everyone globally.
The House of Representatives had earlier passed a nearly identical bill and will again pass the amended bill later Wednesday. With this legislative victory for the Republicans in Congress, President Donald Trump will soon sign one of the most sweeping fiscal reforms in recent U.S. history. A major victory for the richest Americans and corporations, the bill will either allow "job creators" to spend more money on employment, which will push incomes higher, or income inequality will increase with the rich getting richer. The latter case is argued by the Democrats in Congress and the former, of course, by Republicans.
Whomever one believes, there are several facts that all parties can agree on. Corporate taxes have been dropped from 35 percent to 21 percent and the top tax bracket has seen a reduction from 39.6 percent to 37 percent. As provisions kick in, taxes will actually increase marginally for middle-income Americans. The total effect to the deficit will be an increase of nearly $1.5 trillion according to the bipartisan Joint Committee on Taxation.
Many fiscal conservatives, while in favor of tax cuts, have decried the increase to the deficit the tax cut will produce. Many Democrats, however, have applauded the fact that some of the lower income tax rates are also cut. The biggest cut, however, and where the bulk of the rate cut will most be used, is the corporate tax cut. The Obama-era Supreme Court Citizens United case has already granted corporations the ability to spend unlimited amounts of money on campaign donations.
The tax cut for corporations will be nearly impossible to reverse. Which corporation would not spend 15 percent of their annual profit to fight an increase of that amount? With such well-funded opponents, the Democrats will either have to move right or a truly progressive movement will take hold and win elections despite being severely underfunded. At some point however, corporations will spend so much on campaign contributions, and we may already be at that point, that only politicians that obey their wishes will have any chance of getting elected. The strangest thing about this entire tax cut debate is that the amount in question is not a lot of money. The U.S.'s current debt is nearly $20 trillion. The Federal Reserve's (Fed) $4 trillion balance sheet is not even included in this calculation. This means that while $1.5 trillion may be a lot nominally, relatively it is a drop in the bucket. If the Fed can lend itself trillions of dollars interest free and invest it in treasuries, U.S. interest rates will be kept artificially low. Also, any profit derived from these multi-trillion-dollar investments in treasuries gets sent back to the U.S. Treasury at the end of the year, thereby allowing the Fed to make money for the Treasury.
In short, the tax cut, the amount of the cut and the impact it will have on the national debt is a nonissue. Should the U.S. continue to have the support and confidence of the global community and should the dollar continue to reign supreme in global markets, there will be no problem. However, should the United States be isolated from its global allies in the coming years or be wracked by internal scandals that give rise to political and economic uncertainty, the U.S. may drag the entire world into another great recession.
The tax cut passed by Congress will be great for U.S. businesses and will be great for many Americans, this is without question. It will also undoubtedly add to the widening chasm that is the income gap between rich and poor. The tax bill also guts the remaining provisions of Obamacare guaranteeing increased health care costs for those who can already not afford health insurance. The new tax cut will also act as a de facto interest rate cut for the U.S. economy and will be as effective as any the Fed's monetary policy actions. Will it ultimately benefit the average American? Time will tell.