The Trump administration has revealed its expected tax cut. Wants reduce the corporate income tax rate from 35 to 15%, in fact the largest cut in recent American history. The idea of Trump and his gods is that by lowering taxes so drastically, a strong economy will be stimulated investment growth of businesses, with an increase of GDP growth rate and the further reduction in the unemployment rate, which is already historically low in the USA (4,5%).
Furthermore, Steven Mnuchin, Secretary of the US Treasury, argues that the drastic reduction of the rate it will not increase the deficit and public debt because the strengthening of economic growth and the reduction of tax avoidance and evasion will increase the tax base, avoiding significant reductions in tax revenues.
Given that the calculations offered seem very approximate and that, as experience shows, some reforms presented by the Trump administration (e.g. the abolition of Obamacare) have already not found a majority in the Senate, let's try to hypothesize that this tax cut will pass as proposed.
There is an important precedent, Ronald Reagan's tax cuts in the early 80s. Even that reform, like this one, was inspired by a “Supply Side Economics” vision. In that case there was no significant increase in economic growth and the main result of declining tax revenues, accompanied by increased public spending (for rearmament), was the sharp expansion of public debt which rose under Reagan to roughly 30 to over 50 percent of GDP.
If today the debt increases again in the same proportions, the US public debt/GDP ratio would come close to 125%, not far from the current situation in Italy. This would also induce a rating downgrade of the US federal government e an increase in the cost of its borrowing.
And if Supply Side Economics didn't work in the 80s – when the marginal tax rate was reduced from 70 to 50% – what reason is there for it to work today when it is reduced by 20% but starting from already lower levels anyway? It's still, the assumption that tax cuts are sufficient to stimulate an investment boom may prove inappropriate. In fact, as Keynes taught us many years ago and as Nobel prize winners Akerlof and Shiller recently reminded us, investments restart when the "animal spirits" of entrepreneurs are turned on.
Well, it is difficult for those spirits to ignite in a context characterized by still high uncertainty: the crisis of the last decade is in some ways an "overproduction" crisis and entrepreneurs can still be cautious about investing if a stable increase in the aggregate demand.
Then, connected to the previous one, there is another element to consider: the effects on inequality. A corporate-focused rate cut, like this one, would likely generate a shift of wealth from the middle and lower classes to the more affluent, contradicting the Trump campaign's goal of reviving the middle class. This increase in inequality can be predicted on the basis of two effects: one direct and one indirect.
The direct one derives from the fact that the tax reduction is above all for businesses and, therefore, for capital income, not for labor income. The indirect effect could come from Trump's possible need to cut public spending to avoid an excessive increase in the public deficit.
Well, it is presumable that the cut in public spending would go to further weaken the already meager American welfare state, with negative consequences for the middle and lower classes. And, moreover, that asymmetric income growth could generate insufficient stimulus for aggregate demand, which grows more when the incomes of the lower and middle classes rise and grows less when only the incomes of the richest rise.
The last objection is on the lack of elegance of this administration which, when it launches this huge tax reduction, refuses to make public the tax returns of the President and his main collaborators, helping to feed suspicion of a conflict of interest plutocratic.
