Question

In 2018, Congress overhauled the United States Tax code with The Tax Cut and Job ACT (TCJA). The TCJA lowered the tax bracket for everyone for 10 years. Significant changes to the tax code for individuals were lowered tax brackets and higher standard deductions. Hence, fewer individuals will have to itemize their returns.   However the Corporation and business tax cuts are permanent. Will the Corporate tax cuts increase wages and have positive impact on the economy? Also, will the individual tax cut become permanent in the future? Will the government take in more revenue due to a stronger economy even though it will be less per person?   

Answer 1

Each government requires money for its upkeep, maintenance of roads, railways and other infrastructure and to be able to supply funds to essential services such as healthcare, defence, local police etc. This in most cases is done through taxation of various kinds, some of which have been discussed in the case study.

In the case study, we come to know that corporate taxes have been reduced permanently in the United States. The effect of which would be that these companies would have more money to invest in areas wherein they earlier could not invest. As a matter of fact, the industries in the United States pay only a margin in terms of percentage earnings than that of the rest of the world.

When you have extra cash available with you, you are not afraid of hiring more people and investing in new areas. Therefore, the positive impact of this would be that the demand for employees would increase, so would the prices of these employees and the net profits for the company would increase also. This is because a major chunk of money would be retained by business owners which can be deployed to earn maximum revenue.

Some countries like Dubai have previously been able to achieve 0 taxes for individuals. The main reason why I see this happen in a country like the United States is the fact that it is developed enough to be able to collect taxes from the sale of goods and services in the country without requiring income tax to be paid by people. The size of the economy is big enough to be able to support this in the latent future.

But conditions right now in the country due to the pandemic do not allow for such steep measures. A balanced approach wherein people have some additional cash to spend on consumer goods on one hand and the government can collect basic taxes required for its functioning is required to maintain balance.

Please feel free to ask your doubts in the comments section.