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Trump Calls For Large Scale Tax Cuts, But Can America Afford It?

April 26, 2017

The Conference Board of Canada’s Chief Economist Craig Alexander offers the following perspectives:

President Trump proposed large scale tax cuts for businesses and individuals today. If implemented it would represent dramatic tax reform in the United States, which would create significant competitiveness challenges for Canada. However, proposals are only recommendations. Congress has to agree and create the necessary legislation. The full extent of the proposals are likely fiscally unaffordable. Accordingly, more modest tax cuts are likely to be enacted that would pose less of a challenge for Canada. The worst case scenario would be large tax cuts paid for by a border adjustment tax, but that does not appear to be a likely outcome,
—Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.

Insights

  • Today, the U.S. President proposed large scale tax reductions that were broadly in-line with his campaign promises. If fully implemented, this tax reduction would stimulate U.S. economic growth. However, history tells us that tax cuts do not pay for themselves. Indeed, the proposed tax reductions would be very expensive and would lead to significantly larger deficits at a time that the U.S. fiscal path is already unsustainable due to future pressures from Medicare, Medicaid and Social Security. The tax measures would also likely exacerbate income inequality. The President can propose large scale tax relief, but what matters most is what Congress will agree to. The most likely scenario is that Congress will ultimately agree to much more modest tax reductions.
  • There are many elements to the proposed tax relief. A few highlights include:
    • Lowering the statutory corporate tax rate from 35 percent to 15 percent.
    • The tax rate on pass-through businesses would fall from a top rate of above 39 percent to 15 percent.
    • Reducing the current seven personal tax brackets to three at 10 per cent, 25 percent and 35 percent – which would lower personal taxes.
    • Double the standard income tax deduction, so no taxes on the first $24,000 of income.
    • Elimination of the estate tax and alternative minimum tax.
    • Proposes a one-time reduction in taxes on repatriation of earnings from abroad.
  • If Trump’s tax proposals were fully implemented, it would create a significant tax competitiveness challenge for Canada. U.S. businesses would have a tax advantage. Canada would find it more difficult to compete for international talent that can earn more on an after-tax basis in America. However, Canada should not overreact to the competitive risks, as proposals are not actual legislation. Congress will need to pass legislation to make them a reality, and while there may be Republican support for tax relief, it still has to be affordable.
  • One source of additional tax revenues might be a border adjustment tax, which would be a negative outcome for Canada. However, today’s proposals did not include a border adjustment tax and the introduction of one has significant challenges. A border adjustment tax is very complex, which makes it less appealing. It would also have a  negative effect for some major U.S. sectors, like retailers who have a powerful voice in Washington.
  • So, it is important to watch how Congress debates tax reform going forward. It may be very difficult to get bi-partisan support, and many Republicans are fiscally prudent and will not support large deficits.
  • The most likely outcome is more modest tax cuts for businesses and individuals, which would be less of a competitive challenge for Canada.

 


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Photo of Craig Alexander Craig Alexander
Senior Vice-President and Chief Economist

Craig Alexander brings over 19 years of experience in the private sector as an economic and financial forecaster to the position of Senior Vice President and Chief Economist. He oversees the Board’s macro-economic outlook products, custom economic and tourism research.

Follow Craig on Twitter

@CraigA_Eco


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