• fray.news reporter

Read his lips – Trump’s tax plans and his world view


Wall Street was mixed as Donald Trump’s government unveiled its long-awaited tax plan which has been mooted for months. Market analysts said corporations were hoping for more.

Yet his administration seeks to trim corporate tax by 15% to 20%, expands child tax credit to $1,600 from $1,000, doubles the standard deduction for middle-class families, and maintains the top rate of 39.6% for top earners.

The plan surprised most analysts who were expecting a tax break for the super rich, although some of America’s richest said they were against the idea.

Warren Buffett, who’s worth about $80.6bn, was one of the voices raised against the idea of trimming the tax rate for the richest Americans.

Income tax, however, is a relatively new idea across the world, and it's not very high in the US compared with other countries.

Income taxes only really began in the 1850s, but within 100 years virtually all countries across the world had introduced the revenue generator. Before 1850, governments would play an important role in raising revenue mainly by what’s known as asset income through the sale of land.

Then around 1840 local governments became more important, contributing a share of government revenue again by raising property tax. After the Great Depression, federal or central governments throughout the world became larger, and needed revenues which were collected as income tax.

The big surge in income tax globally took place in the 1960s, mainly through what is known as consumption tax.

But countries such as France, Denmark, Norway and Sweden have far higher income tax rates of more than 30% on average, while on the other side of the scale is Saudi Arabia where the income tax rate is more like 2%.

France is particularly severe with its rate starting at 14% for those earning less than €26,818 a year, and rising to 45% for those earning above €151,261 per annum. The rich in Denmark pay 60.4% tax, and Sweden, 56.4%. In emerging markets like South Africa for example, those earning R188,000 a year are taxed at 18%, the richest who earn over R406,401 a year are taxed at 36%.

The issue of tax has been a constant challenge to American presidents, including George W Bush senior, who was excoriated for saying “read my lips, there will be no tax increase” while on the campaign trail.

He was forced to raise taxes during his tenure in power.

Trump now has to ensure that Congress passes his new tax law before it leaves for Christmas.

Its biggest challenges is how the bill deals with state and local tax deductions, which is planned to be capped at $10,000, but won’t be enough for Republicans in some high-tax states where the middle class makes use of this deduction.

The plan will add at least $7-trillion to the debt over the next decade, and possibly slow growth in the long term. The new document also seeks to reduce the current seven tax brackets to only three.

That means the new income tax rates start at 12% for the lowest bracket which is down from 15%, the middle rate is 25% down from 28% and the top bracket remains at 39.6%.

In a big turnaround, it also eliminates itemised deductions, except those for charitable contributions as well as mortgage, property tax and retirement savings. The House wants to cap what’s known as 401(k) contributions at $2,400 which will negatively affect those who are 50 and older.

The Tax Policy Center says the new plan will increase the US’s national debt by $7-trillion over the next ten years. Economists say the plan is likely to dampen economic growth in the long run, because the US debt-to-GDP ratio will be more than 100%. The interest on this debt will consume much of the federal budget, thus lead to a lack of money to refurbish America’s infrastructure.

While Trump’s plan is under pressure as it's also likely to help the wealthy far more than the middle class, according to the Tax Policy Center. Once all exemptions and deductions are totalled, the poorest will receive about a 0.5% tax break, while the richest an 8.5% break.

That’s the reason Trump’s tax plan will increase the deficit because the most affluent already contribute the lion’s share to total tax revenues.

The powerful National Association of Home Builders lobby has already indicated it will oppose the new tax plan because more taxpayers would take a standard tax deduction as opposed to the mortgage-interest deduction, thus hurting home sales.

The US has the fourth-highest corporate tax rate in the world, with the United Arab Emirates, Comoros and Puerto Rico the only countries with higher rates of tax for companies.

Worldwide, the highest average statutory corporate income tax rate is 22.96%, according to the Tax Foundation.

Europe has the lowest regional rate as a whole at 18.35%, while Africa and South America have the highest regional rates at an average of 28.73% – 28.2% weighted by GDP for Africa and 32.98% weighted by GDP for South America.


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