What will be completed about Trump’s tax cuts? We fall divided

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 What can be done about Trump's tax cuts?  We fall divided

The Tax Cuts and Jobs Act 2017

One of President Joe Biden’s key promises to the campaign was the repeal of the 2017 Tax Cut and Jobs Act (TCJA), passed during the Trump administration. Biden and other Democrats have criticized the bill as a tax break for wealthy households and businesses, and inflated the national deficit. As a replacement for the TCJA, Biden would raise the corporate tax rate from 21 to 28 percent and the federal income tax rate to 39.8 percent for those who earn at least $ 400,000. He has also proposed new taxes on corporate profits, capital gains, payrolls, and estate distributions.

While Congressional Democrats now have the majorities required to overturn the TCJA, it would only exacerbate the economic hardship of Americans unemployed due to the pandemic, including Black and Hispanic Americans who historically have no access to capital. Instead, Biden and Congress should delay implementing tax increases until the pandemic has subsided. Then Congress should reform the TCJA to limit corporations’ use of their savings as part of tax cuts and limit stock buybacks in favor of reinvestment or increased dividend payouts.

Tax cuts and savings: who saved more?

The TCJA created savings for Americans in every tax bracket, with a tendency towards higher earners, who generally pay more tax initially. By 2025, after-tax incomes under the TCJA are expected to increase accordingly for each of the following income recipients:

  • “The Top 1%”: Increase of 2.1 percent;
  • Top Fifth: 1.8 percent more;
  • Fourth fifth: 1.4 percent more;
  • Middle fifth: 1.3 percent more;
  • Second fifth: 1 percent more;
  • Lower fifth: increase of 0.7 percent.

The TCJA has also fueled the country’s economic growth, bringing the unemployment rate to all-time lows (pre-COVID-19). A 2019 study by the Federal Reserve Bank of Dallas found the TCJA “likely increased GDP growth by 0.8 percentage points and employment growth by around 0.24 percentage points in 2018”. This is due to the TCJA’s changes to U.S. tax laws encouraging businesses to invest and create jobs in America, not overseas.

All of that economic dynamism has stalled thanks to the COVID-19 pandemic that left millions of Americans jobless, saw millions fall behind in housing benefits and starve many. A necessary but painful factor in the economic slump were government and local contracts that forced many companies to either take vacations or lay off their workers. According to the Congressional Research Service (CRS) “in April [2020]Every state and the District of Columbia had unemployment rates higher than their highest unemployment rates during the Great Recession. “

Unemployment: Hardest hit

The pandemic has left Americans unemployed in a variety of industries, not just businesses that provide personal services. The CRS reports that the leisure and hospitality industries had the highest unemployment rates last year, while mining and extraction workers had the second highest rate of 13.1 percent last December. Although the overall unemployment rate has improved since then, the Department of Labor continues to report new unemployment insurance claims after the vacation increase in new coronavirus cases. Additionally, the permanent layoff rate has exceeded that of temporary vacation days, and both the Congressional Budget Office and the Federal Reserve estimate that the unemployment rate will exceed 6 percent in the next three years.

Black Americans have taken the brunt of this economic downturn. In April 2020, the unemployment rate among Black and Hispanic Americans was 16.7 percent and 18.9 percent, respectively. Although these rates have decreased since then, they still exceed those of other racial and ethnic groups. This shows a much larger and sadder reality that, historically, color consumers have not had access to capital to take advantage of important opportunities like securing or refinancing a mortgage.

Americans from all over the country are suffering, as the numbers show. A hike in taxes – small as it may be – would have a detrimental effect on their economic well-being, which is already fragile due to the growing pandemic.

Biden’s challenges

It also makes little practical sense for the administration to push for tax reform due to new challenges that could prolong the economic crisis. First, President Biden’s campaign to deliver 100 million vaccines in 100 days has been hampered by a rocky transition and newly reported mutations in the coronavirus. Experts say that since new strains of the virus could reduce the effectiveness of current vaccines, the more people choose not to vaccinate, the more the virus can spread and mutate. The government should use the full force of the federal government to stop addressing these new threats before pushing for new measures that could shake an already fragile economy.

Second, President Biden has to grapple with an evenly divided Senate that has to ratify his cabinet candidates, examine its ambitious legislative proposals, while holding an impeachment trial against former President Donald Trump. Biden’s $ 1.9 trillion COVID-19 aid package is already facing pressure from senators on both sides of the aisle because of the high price. Biden advisors have since proposed splitting the package in two to lessen the economic relief that families, as well as state and local governments, could get to deal with the pandemic. With a lack of time in the Senate and a unified electoral bloc, Biden should save as much political capital as possible and stop a potentially divisive tax overhaul if he wants to get economic relief quickly.

Biden understands that Americans are suffering from the economic consequences. After taking office, the president quickly signed several executive orders that delayed the eviction and repayment of student loans for those struggling to make ends meet. Biden must now decide whether this economic caution should also apply to our taxes, as I believe. Even Biden’s Treasury Secretary Janet Yellen admitted that resetting the TCJA would now do more harm than good.

Tax cuts and the way forward

However, with the pandemic behind us, Congress should reform the TCJA to reverse an unintended consequence of the tax law – increasing company share buybacks. Companies often buy back their own stock, usually in good economic conditions, in order to add value to the stock and allow their executives to exercise their stock options when the stock reaches the right price. These buybacks are typically funded by taking on new debt, which reduces company liquidity to weather the economic downturn and limits internal growth.

However, the TCJA’s corporate tax cuts resulted in share buybacks in steroids as the tax burden on companies limited the need to raise new debt. According to the Harvard Business Review, “In 2018 alone, company profits were driven by the [TCJA]S&P 500 Index companies combined repurchased $ 806 billion, around $ 200 billion more than the previous 2007 record. “However, the government’s loss of tax revenue under the TCJA resulted in an increase in the public deficit, thereby shifting corporate savings onto taxpayers as debt. When households are exposed to these debt burdens, they are more vulnerable in weaker economies like the one we are in right now. Congress should reform the TCJA to ban share buybacks to strengthen our economies and require companies to either reinvest their tax savings or distribute them as dividends.

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Omar Franco

Omar Franco is the general manager of Becker’s Washington, DC office. He is also a member of the Board of Directors of the Congressional Hispanic Leadership Institute, the Advisory Board to the Chairman of the Friends of the National Museum of American Latino, and Secretary to the Latino Coalition. In 2019, for the second year in a row, Omar was named a “Hired Gun” on The Hill’s annual list of Top Lobbyists. Previously, he was Chief of Staff to Congressman Mario Diaz-Balart (R-FL).