By Ovunc Kutlu
NEW YORK (AA) – As the U.S. president and Congress consider ways to reform the U.S. tax code, there is disagreement about priorities, including contentious issues such as loopholes, the impact of taxes on the government’s balance sheet, and how taxes fuel economic growth.
“[Tax reform] is a huge challenge for the U.S.,” Mayra Rodriguez Valladares, the managing principal of New York-based financial consulting and research firm MRV Associates, told Anadolu Agency.
Rodriguez Valladares thinks tax reform would benefit from streamlining the process for individuals and corporations to fill out tax forms.
“You want to simplify it in a way that would encourage people to pay their taxes. Also, for corporations, there are so many loopholes … If you were able to reduce those loopholes, you would actually get the corporations to pay their taxes,” she argued.
Even though President Donald Trump has controversially pledged to lower corporate tax to 15-20 percent from a nominal 35 percent, and give tax breaks to the middle class, eliminating some loopholes would mean that government revenues would not be impacted as deeply, said Rodriguez Valladares.
“If you lower the tax rate and get rid of some of the loopholes, you may actually get more money into the coffers to pay for the needed infrastructure and education reform,” she said.
– Deficits and workforce participation
But Ed Hirs, an economist at the University of Houston, told Anadolu Agency, “There aren’t many loopholes” in the current tax code, and lowering the tax rate would not help.
“You can’t cut taxes and expect the economy to grow without running up large deficits. Now, in the U.S., we have almost 16 years of structural deficits,” he said.
Under the presidency of Bill Clinton, instead of deficits, the U.S. government ran budget surpluses in 1998, 1999, 2000, and lastly in 2001, which saw a budget surplus of $127.3 billion in nominal dollars.
On the other hand, the federal budget deficit for fiscal year 2016, which covers October 1, 2015 through September 30, 2016, was $587 billion, up 34 percent from the previous fiscal year, according to the Treasury Department.
By lowering the tax rate, Trump hopes to achieve higher growth for the U.S. economy, although historically the case for this happening is mixed at best.
After expanding 2.6 percent in 2015, the U.S. economy grew by 1.6 percent last year — its worst performance since 2011. Trump, however, is aiming for a 4 percent annual growth rate.
“I think the only way he gets [4 percent growth] is if he is able to increase the workforce participation. We are down about 4 percent in terms of workforce participation from our peak, which was in the ‘90s,” Hirs said.
The labor force participation rate, which refers to number of people who are either employed or actively looking for work, averaged above 67 percent in 1998 and 1999. The rate was 63 percent in March, according to the Labor Department’s Bureau of Labor Statistics.
“There are a lot of people who might like to work [but] who aren’t working,” Hirs said, adding, “We are relying so much on the service economy. We need more manufacturing and technology-incentive jobs.”
– Geopolitical anxiety
Rodriguez Valladares said the American economy has finally emerged from recession, but it is growing “very slowly” pointing to “increased anxiety from geopolitical risks.”
“We’re worried about North Korea, Iran, the effects of Brexit, [and] Russia is a concern,” she said. “I think the idea that we might achieve something like 4 percent is a bit ambitious.”
“In order for the U.S. to grow, it’s not just about the monetary policy, [but] we also need to get the fiscal policy side — that would be the legislature. Even with a Republican majority, there’s enough infighting among themselves,” she concluded.
