The United States in Search of a Fiscal Policy

In the face of the imminent closure of the government due to the lack of spending authorization, Congress agreed 15 days ago to approve a law that allows it to maintain the operation of the government until the end of September. The law provided some changes in spending, mostly taxes from the Democratic minority, since it required a vote of at least 60 members of the Senate, eight more votes than the Republican Party has.

The agreement postponed President Trump’s two principle proposals: the start of construction of the wall bordering Mexico, and $18 billion in cuts to a variety of public offices. What’s more, it included additional funds for Planned Parenthood that the Republicans hope to remove because the organization provides abortions.

In return, Trump got an increase of $15 billion for the Pentagon budget, half of his initial proposal, and another $1.5 billion for border security, with some restrictions.

The disagreement between the governing party and the Democrats anticipates a renewed debate in September. At that time, faced with a new threat of government shutdown and the need to increase the debt ceiling, the governing party will surely insist on its priorities and the Democrats will insist on theirs.

As for taxes, at the end of April, the governing party presented a very concise proposal to negotiate in Congress.

There are various important changes in the taxation of businesses. The first is that the tax rate on profits will be lowered from 35 percent to 15 percent, in whatever legal form. This proposal should be complemented by a decision, open to discussion, on the validity of the variety of existing exemptions.

More substantially, the proposal looks to end the current system of taxing the profits of companies abroad in order to move to a territorial system, in which the majority of the profits obtained outside the country will be exempt from taxes. Under the current system, it is estimated that American businesses have about $2.6 trillion retained abroad to protect them from taxes. The proposed change looks to be in favor of their repatriation, with a one-time payment estimated to be 10 percent, which is very “competitive.”

As for the people, the proposal looks to reduce the tax brackets from seven to three, although their limits are yet to be determined, with the respective rates of 10 percent, 25 percent and 35 percent, the latter falling from the previous rate of 39.6 percent. Trump also proposes to eliminate the 3.8 percent tax on the investment income of people whose earnings exceed $200,000 a year. Another item eliminated is the inheritance tax.

In addition, it proposes to double the minimum income to pay taxes, which is currently $6,300 for singles and $12,400 for married couples. It also proposes to eliminate the deduction for payment of state and local taxes in calculating income tax. The only deductions that will be retained are interest on mortgages for the purchase of a house, and charitable contributions.

The plan opens up a discussion on some of the major issues of tax reform.

The first is its period of validity. Currently, any fiscal program that increases the public debt with a maturity of more than 10 years requires a vote of at least 60 senators. If this majority is not reached, or even passed, the tax reductions would only be valid for 10 years.

A second issue is the estimate of the loss of revenue that will follow the tax cut and the consequent increase in public debt. Depending on the final details, it is estimated that amount could be between $3 trillion and $7 trillion in the next decade. In its defense, the government maintains that a good part of this cost will be compensated by the increase in economic activity induced by the lower taxes, a statement traditionally open to controversy.

Another huge issue is the effect on income distribution. According to the government, the plan favors the middle class over high-income earners because it doubles the nontaxable minimum and eliminates various deductions that only benefit the rich. But according to the previous details, it proposes a reduction of several taxes, which up to now have mostly affected high-income earners. The resulting final plan is therefore uncertain, so we will have to wait for the final wording in order to issue a more authoritative opinion.

Even with a variety of points open to discussion, the plan seems far from arousing the will of Congress. It has already raised objection from the Democrats for the potential regressive effects of the tax distribution. For the Republicans’ part, although the traditional Republican position for lowering taxes is already known, their preference for a balanced budget will also be present to avoid an increase in the national debt.

For now, the United States doesn’t have a fiscal policy. President Trump has not achieved approval for his budget proposal while going for tax reform as well as a debt level that will face a tough negotiations in Congress.