WASHINGTON — The Republican tax bill headed for President Trump's desk is the most ambitious test yet of his approach to economic policy — that his ideas for strengthening American business will increase the prosperity of the American people.
Mr. Trump championed the plan to cut corporate and individual taxes by $1.5 trillion over the next decade, forgoing revenue that could have been spent on new roads, worker training or better schools, on the theory that investors will make better use of the money, creating wealth for all Americans.
He is pressing to reduce federal regulation, declaring last week that the government has imposed too many rules and constraints, creating a burden that "destroys our companies" and hurts American workers.
And bolstering business in the United States is the guiding principle of Mr. Trump's approach to trade — although his vision of what will help companies competing in a global economy differs sharply from the perspectives of many corporate executives. Mr. Trump, whose worldview is that exports strengthen the economy while imports drain away the nation's wealth, wants to erect tariffs and other trade barriers to protect American companies from foreign competition, arguing that will translate into more and better-paying jobs.
In recent decades, both political parties pursued economic policies focused on helping people directly. Republicans championed lower income taxes; Democrats emphasized expansion of the social safety net. Both parties sought to improve education through regulation and subsidies.
Continue reading the main story
And presidents of both parties backed trade deals that sacrificed manufacturing jobs for a wave of imports that let consumers buy televisions, furniture and clothing at lower prices.
Mr. Trump has substituted a singular focus: increasing the output of the United States economy.
His political opponents, and some of his allies, have criticized Mr. Trump's economic views as inconsistent. Some Democrats embrace Mr. Trump's concerns about trade deals while they bitterly oppose the tax bill and regulatory rollbacks. Republicans have welcomed his advocacy for tax cuts as some bemoan his protectionist approach to trade.
But Mr. Trump sees tax cuts and trade restrictions as tools in the service of the same goal.
"We're not going to lose our businesses again like has happened over the last number of decades," he said in an address that the White House billed as a "closing argument" for the tax plan. "America is coming back bigger and better and stronger than ever before."
The tax bill epitomizes this approach. Republicans contend that reducing corporate taxation will encourage businesses to increase investment, driving faster growth and prompting businesses to pay higher wages. The White House Council of Economic Advisers projected that the plan would lift a typical household's income by $3,000 to $7,000 a year.
"I think a rising tide does lift all boats," said Michael R. Strain, the director of economic policy studies at the conservative American Enterprise Institute. "You increase incentives for broad categories of things, like investment and labor supply, and you kind of let the economy do its thing."
Republican are so confident, they have repeatedly predicted the government will not even lose money because lower rates will be offset by economic expansion. Government and private sector economists estimate the United States will lose as much as $1 trillion over the next decade, even with tax-cut-fueled economic growth.
"We think the country's been underperforming, and we believe this will get the country performing better," Senator Mitch McConnell, Republican of Kentucky and the majority leader, said this month.
Democrats have sharply criticized the plan as a revival of "trickle-down economics." They note that previous rounds of business-focused tax cuts have not produced the broad prosperity that many conservative economists predicted. After the most recent round in the early 2000s, under President George W. Bush, companies mostly distributed the windfall to their investors in the form of share buybacks or higher dividends. A 2015 study of the net effect found that neither corporate investment nor wages increased as a result of the tax cut.
"It's not tax reform," Senator Elizabeth Warren, Democrat of Massachusetts, said of the tax bill. "It's a heist."
The Republican plan does cut individual taxes, but the legislation skews toward business cuts and would reduce corporate tax revenue by 18 percent over the next five years compared with an 8 percent cut in personal income tax revenue, according to the Joint Committee on Taxation.
It also provides little direct benefit to the one-quarter of households that do not make enough money to pay federal income taxes but are still required to make payroll tax payments. In previous tax overhauls, Republicans supported expansions of the earned-income tax credit — a cash subsidy that offsets payroll taxation. The House speaker, Paul D. Ryan of Wisconsin, proposed a new expansion, but in a sign of the shift in party priorities, Republicans set aside the idea to allow larger business tax cuts. The final bill does increase a refundable credit for families with children.
The business-centric approach has found a natural constituency among corporate chieftains, who say lower taxes will prompt them to expand and invest, although few have offered specific proposals.
"We pay a lot of taxes and we'll get a benefit, but the real benefit will be in American society and the broader economy," Brian T. Moynihan, the chief executive of Bank of America, told CNBC.
Mr. Moynihan said his company might expand its branch network in a wider range of cities, which would be a shift from its current approach. Bank of America has closed more than 1,600 branches over the last decade in response to tighter regulation, slower growth and the rise of online banking.
Notably, the tax bill takes aim at the more traditional approach to economic development by reducing incentives for investment in infrastructure and education.
The broadest change limits the federal deduction for state and local income taxes paid to $10,000, putting pressure on state and local governments to cut taxes and spending to compensate for the lost tax break.
The legislation ends a popular program that provided tax credits to investors in public works projects like transportation, renewable energy and school construction.
It reduces tax incentives for spending on research and development.
"If you had to ask what makes Silicon Valley a global economic leader, it's not California's low taxes and low regulation," said Jason Furman, a senior fellow at the Peterson Institute for International Economics and the former chairman of President Barack Obama's Council of Economic Advisers. "This bill is absolutely designed to undermine the sources of America's competitiveness. I can't put a number on it, but if you ask what the economic impact is, it's going to be negative."
Mr. Trump is pursuing a similar shift in regulation, seeking to reverse or rewrite a host of rules intended to protect workers and consumers, under the theory that freeing companies from "red tape" will allow businesses to prosper, with wide-ranging benefits.
In remarks at the White House last week, Mr. Trump argued that regulation was impeding private investment in infrastructure. He held up a long, multicolored chart that he said reflected the permitting process for the construction of "a highway or a roadway."
"By the time you finished, you probably gave up," Mr. Trump said.
The Obama administration also sought to strengthen the social safety net, which helps workers maintain a minimum quality of life, most notably through the Affordable Care Act, which makes it easier for workers to obtain and maintain health insurance, even if they shift jobs. The Trump administration is seeking to reverse that legislation. Mr. Trump and congressional leaders also have said they are planning a broader overhaul of social welfare programs.
"We have a welfare system that's basically trapping people in poverty and effectively paying people not to work," Mr. Ryan told a Denver radio station this month. "We've got to work on that."
Mr. Trump's approach to trade policy is similarly focused on businesses.
The administration's proposed budget, released this year, would cut funding for a variety of retraining programs that help workers who lose jobs to foreign competition — the solution long advocated by economists and politicians of both parties to help workers adjust to globalization.
Instead, Mr. Trump has emphasized the importance of protecting and expanding old-line industries like coal, cars and steel. The administration asserts that expanding the industrial sector will create high-paying, blue-collar jobs, and that it is more important for workers to have good jobs than for consumers to be able to buy cheaper imported food, clothes and cars.
It is a crucial reason that the administration is weighing tariffs on imports of steel, aluminum, solar products and washing machines. And why the administration is seeking to renegotiate the North American Free Trade Agreement in favor of American companies, a trade pact that Mr. Trump has threatened to abandon if Canada and Mexico do not accept major changes, like a proposal requiring a higher percentage of automobile components to be made in the United States.
Many business leaders see tariffs as tax increases, and trade rules as just another kind of burdensome regulation. And many companies depend on foreign suppliers to hold down their productions costs, allowing them to compete with foreign rivals.
"In industry after industry, many of the most successful American businesses are worked into global supply chains," said Phil Levy, a former trade adviser in Mr. Bush's administration. "Having low trade barriers can be as important to them as having low taxes."
For Mr. Trump, however, lower taxes and higher tariffs serve the same purpose: fortifying the United States economy in what he sees as a zero-sum competition among nations.
He has said since the start of his presidential campaign that his proposals would revive America's fortunes and turn around a country he sees falling behind as a result of wrongheaded economic policies that have put United States companies at a disadvantage.
In recent weeks, he has predicted that his tax cuts will provide rocket fuel for the economy and that economic growth could reach 6 percent a year — three times the average pace since the 2008 financial crisis.
Mainstream economic forecasters regard such forecasts as fanciful. With the passage of the tax plan, Mr. Trump has won the chance to find out.
Continue reading the main story
