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Editorials Globe editorial: Trump’s tax reform is a creature from the swamp

The Republican tax bill, which as we went to press on Tuesday night was near passage by the Senate, is legislation designed to be satirized, mocked and, in 2018, run against.

The Republicans think passing it will help them retain control of Congress in next year's mid-term elections. But given that the bill's main accomplishment involves reducing taxes for a relatively small number of upper-income taxpayers, and that polls shows it is extremely unpopular, it's difficult to see how this adds up to the kind of populism that Donald Trump once claimed to represent.

"Drain the swamp?" It's wallowing in it.

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At first blush, the Republican Party's long-promised tax reform offers most Americans at least some benefits. But as Tom Waits once sang, the large print giveth, and the small print taketh away. Yes, average lower- and middle-income taxpayers see their taxes fall, slightly. But the main beneficiaries will be high earners and corporations.

What's more, those tax cuts are largely being financed by borrowing. To prevent the deficit from growing too much, the bill makes most of the personal tax cuts temporary, expiring in 2025. That means that the long-term plan is actually to raise tax rates on most lower- and middle-income earners, while delivering a substantial and permanent payoff to the wealthiest Americans.

According to an analysis by the Tax Policy Center, the bill would cut taxes for 80 per cent of American taxpayers – in 2018. But by 2027, a full 53 per cent of Americans would actually be paying higher taxes, with those paying more overwhelmingly concentrated in the lower and middle classes.

Middle-income households will pay about $900 (all figures in U.S. dollars) less in taxes, for a tax cut worth about 1.6 per cent of after-tax income. But households in the top 1 per cent, earning more than $733,000, will see an average $50,000 tax cut, worth 3.4 per cent of after-tax income. And those in the top 0.1 per cent, with incomes above $3.4-million, will get an average $190,000 tax cut.

And then, beginning in 2025, those personal tax cuts start to be rolled back – particularly for anyone not in the 1 per cent. The result, according to the Tax Policy Center, is that by 2027 the poorest 40 per cent of Americans will be paying slightly higher taxes than they are today. The same goes for those Americans in the middle-income quintile – the middle class. But in 2027, members of the top 1 per cent will be paying about $20,000 less in federal taxes than they are now.

The bill also substantially lowers the corporate tax rate – from 35 per cent to 21 per cent – which follows on the heels of steps taken in other advanced economies, such as Canada. There will be economic benefits from this, though it won't lead to an American boom. The U.S. economy is already running close to capacity.

And in any case, there's no sound reason that a cut to corporate taxes had to be paired with a cut to personal taxes tilted to the top end of the income scale.

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The bill also encourages a practice that Canadians who have been following this country's fight over the use and abuse of small-business taxes will be familiar with. A corporate tax rate that is much lower than the top personal tax rate, combined with measures making it easier for individuals to turn their personal income into less-taxed corporate income, will encourage the use of what Americans call "pass throughs." It's similar to the benefit that a small minority of mostly upper-income Canadian taxpayers can receive by incorporating.

The Republicans, unlike the Liberal government in Canada, are not trying to limit that benefit. On the contrary, the bill widens a substantial loophole that is really only of use to upper-income Americans.

There's nothing "conservative" about showering the highest earners with the greatest benefits. Republicans could have chosen to focus tax cuts on the middle class. In Ontario two decades ago, it's what a Progressive Conservative Mike Harris government did.

President Trump got elected as a populist and a non-traditional Republican. He said he would not preside over a tax reform that was mostly about benefiting wealthy taxpayers like himself. And yet, less than a year after his inauguration, this is what he and his party have delivered. We think one of Mr. Trump's favourite Twitter words sums it up: Sad.

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