Trump’s Ambitious but Disastrous Tax Plan

The United States Congress approved this week the tax package presented by President Trump, which he pompously dubbed “The Great and Beautiful Plan” (One Big Beautiful Bill). The plan is characterized by cuts in spending for social and health programs, as well as an extension and expansion of tax exemptions for individuals and businesses.

According to Trump, this combination will spur growth and economic expansion in the United States (Make America Great Again). Financial markets have reacted positively to this plan largely because they expect the private sector to benefit significantly from lower tax rates. However, independent analyses suggest that the effects of this tax plan will be greater fiscal deficits, a higher level of public debt, lower long-term economic growth, and increased economic and social inequality.

According to estimates from the Congressional Budget Office (CBO), an autonomous entity with technical independence, Trump’s tax plan will result in an increase in public debt of more than three trillion dollars in the coming years. This would be the result of a significant cut in public spending (of around one trillion dollars), accompanied by an even larger drop in revenue, stemming from the exemptions the plan would grant, especially to businesses and high-income individuals.

The spending cuts will indeed focus on reduced resources for health (Medicaid) and food programs (SNAP). In fact, various estimates suggest that millions of people would lose access to health services and that many of the gains achieved in recent years in this area, stemming from what was known as Obamacare, the health care reform pushed by President Barack Obama, would be reversed.

Other organizations and independent analysts have pointed out that the positive effect on the economy will be short-term, and that in the medium term, the United States will experience slower growth as a result of a higher tax burden. It is worth noting that the logic of Trump’s proposal is based on the analytical fallacies of what was known at the time as “supply-side economics,” which recognized economists consider a kind of “voodoo economics” or pure quackery.

The approved tax plan also includes a 1% tax on all cash remittances and similar transactions. It is worth noting that this tax diluted from an initial proposal of 5%, which was then reduced in the House of Representatives to 3.5%, and finally decreased in the Senate to just 1%. This tax, applying only to cash transfers or via money orders or cashier’s checks, will likely raise much less than initially expected, although, on the other hand, it could contribute to greater financial inclusion for the immigrant population seeking to avoid paying the tax. In any case, it is evident that the majority of the burden of this tax will fall on low-income and vulnerable migrant populations.

The combination of Trump’s economic policies (a protectionist tariff policy and an irresponsible fiscal policy) has caused a continuous depreciation of the dollar throughout the year. This is because investors perceive a less competitive and more indebted U.S. economy in the future, leading to a decrease in their confidence in the dollar. Thus, it is not surprising that the dollar has depreciated by nearly 15% against the euro so far this year and by about 10% against the Japanese yen and the British pound.

This poor combination of public policies has already been reflected in a lower interest in long-term U.S. bonds, which in turn has translated to an increase in the long-term interest rates that the U.S. Treasury will have to pay. This, in turn, has already resulted in a downgrade of U.S. public debt ratings by the rating agency Moody’s.

In summary, Trump’s great and beautiful tax plan could ultimately end up being a grand and disastrous plan that will only bring greater deficits, more debt, higher financial costs, less growth, and greater inequality. Regardless, with mid-term elections around the corner, it is not entirely far-fetched to think that the short-term positive effects could end up benefiting President Trump despite the potential negative medium- and long-term effects.