Tax Reform in the United States

Published in La Nación
(Costa Rica) on 01 May 2017
by Jorge Guardia (link to originallink to original)
Translated from by Natalie Harrison. Edited by Helaine Schweitzer.
If the United States’ tax reform proposal had no chance of passing, I would not bother to analyze it. But that’s not the case. The probability of passing is high. It would be advisable to look at its effects in the U.S. and internationally.

Although the proposal is missing many details, the following stands out: it reduces the tax on businesses from 35 percent to 15 percent; it reduces the progressive tax scale of citizens to only three categories: 10 percent, 25 percent, and 35 percent (currently, the tax goes as high as nearly 40 percent); it abandons the idea of global income in order to embrace territorial income (like in Costa Rica); it eliminates nearly all deductions from gross income, including deductions for interest, and excepting expenses for home mortgages and charitable contributions; and it also eliminates the inheritance tax, currently at 40 percent.

The principal effect would be to increase the income of taxpayers in order to increase consumer spending and investment. This would increase the aggregate demand, stimulate growth, employment, and salaries (to bring the work force closer to being fully employed), but would increase the fiscal deficit and, perhaps, the taxes on interest income, although these are aspects of the tax reform proposal that have not yet been quantified. It would improve the tax structure to reduce exemptions, deductions, and exclusions, reduce conflicting interpretations with respect to the assignment of resources, and improve productivity.

The primary criticism is that the plan would not be neutral against the fiscal deficit, as the lowering of taxes would not necessarily balance out with the greater taxes generated by economic growth (supply side economics), as happened in Reagan's administration. The counterargument is that, although Reagan won the presidency, the Democrats retook Congress and the Senate and had no method to reduce spending, and due to this, the deficit increased. Now the situation is different. There will be reductions to costly Democratic expenses and, if Obama’s health care law is repealed, there will be substantial savings.

I believe that the tax reform proposal is good. It would increase growth and employment in the U.S., and, most importantly, would inspire the rest of the world to effect similar reforms in order to be competitive. In Costa Rica, the pressure would be twice as strong: the corporate tax would have to be lowered again from 30 percent to 15 percent, and there would be pressure not to impose the worldwide tax and to lower the spending more substantially to finance the deficit. My worry, however, is based on the effect the proposal will have on the movement of capital, as it could affect exchange rate values.


Reforma tributaria en EE. UU.

Actualizado el 01 de mayo de 2017 a las 10:00 pm

Por Jorge Guardia

Si la propuesta de reforma tributaria del gobierno de Estados Unidos no tuviera ningún chance de pasar, no me molestaría en analizarla. Pero no es así. Las probabilidades son altas. Conviene empezar a ver sus efectos allá y en el mundo.

Aunque faltan muchos detalles, sobresale lo siguiente: reduce la tasa a las empresas del 35% al 15%; suaviza la progresividad (escala) al ingreso de las personas físicas a solo tres: 10%, 25% y 35% (actualmente, la tarifa llega casi al 40%); abandona la renta mundial para abrazar el principio de renta territorial (como en Costa Rica); elimina casi todas las deducciones de la renta bruta, incluidos intereses, excepto gastos por hipotecas para comprar casa y contribuciones caritativas; y también elimina el impuesto a las sucesiones, hoy en un 40%.

El principal efecto sería incrementar el ingreso disponible de las personas físicas y jurídicas para aumentar los gastos en consumo e inversión. Subiría la demanda agregada, estimularía el crecimiento, el empleo y los salarios (por estar la fuerza laboral cercana al pleno empleo), pero subiría el déficit fiscal y, quizás, las tasas de interés, aspectos aún no cuantificados. Mejoraría la estructura tributaria al reducir exenciones, deducciones y exclusiones, se ampliaría la base impositiva, reduciría distorsiones contrarias a la mejor asignación de recursos y mejoraría la productividad.

La principal crítica es que no sería neutral frente al déficit fiscal, pues la baja de impuestos no necesariamente se compensaría con mayores ingresos generados por el crecimiento económico ( supply side economics ), como sucedió en el gobierno de Reagan. El contraargumento es que, si bien Reagan ganó la presidencia, los demócratas retuvieron el Congreso y el Senado y no hubo manera de reducir el gasto; por eso subió el déficit. Ahora, la situación difiere. Habrá reducciones a las dispendiosas erogaciones demócratas y, si se reforma el Obamacare, habría un ahorro sustancial.

Yo creo que la reforma es buena, aumentaría el crecimiento y empleo en EE. UU. y –lo más importante– inducirá al resto del mundo a efectuar reformas similares para competir. En Costa Rica, la presión sería doble: habría que rebajar la tarifa corporativa del 30% al 15%, no imponer la renta mundial y bajar más sustancialmente el gasto para financiar el déficit. Mi preocupación, no obstante, estriba en el efecto en los movimientos de capital, pues podría afectar las cotizaciones cambiarias.
This post appeared on the front page as a direct link to the original article with the above link .

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