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How does Trump tax cuts, tariffs make the coronavirus recession worse

President Trump’s pre-pandemic economic blueprint of massive tax cuts and the global trade war not only failed to deliver the promised surge in domestic growth and investment, now seems to have made the US more vulnerable to the devastating financial impact of the coronavirus outbreak.

Even before the pandemic pushed the US into what was almost certainly a recession, the benefits of Trump’s policy on taxes and trade were largely offset by the cost of soaring national debt and damage to U.S. foreign relations. – challenges are now magnified by the health crisis.

“The lasting legacy is greater deficits and higher debt [as a share of the economy]”Which means what we are doing in response to this pandemic is piling up something that is already very messy,” said Joel Prakken, U.S. chief economist at IHS Markit.

The Tax Cuts and Employment Act – Trump and the 2017 GOP tax repairs – is estimated to cost the federal government at least $ 1 trillion in lost revenue over 10 years, according to various government and private estimates.

Individual tax rates are reduced until 2025, but by far the most expensive feature of this law is the permanent reduction in U.S. corporate income tax rates to 21% from 35%.

Lower corporate tax rates, plus tax write-offs on most foreign business revenues, will make the US more competitive globally, argues. With tax savings, the company will increase domestic investment. U.S. multinational companies will repatriate deposits deposited abroad and invest domestically, and that will prevent capital flight to offshore destinations, which ultimately benefit workers in America.

But economists widely agree that tax cuts, while providing a small stimulus for growth especially in 2018, fail at its core goal.

Instead of increasing capital and investment spending or turning away from offshoring, many US companies focus on increasing dividends and repurchasing their own shares, which mainly benefits high-income investors. Buyback reaches record levels in 2018 and remain strong in 2019.

Far from leaping forward, the U.S. economy continue the long-term but modest recovery from the Great Recession of 2008-09.

Economic growth increased in 2018 to 2.9%, but fell back to 2.3% in 2019, about the average growth over the past decade and well below the 4% promised by Trump and some of his officials.

As for income, some workers see profit but for the most part, it is a continuation of the long-term stagnation of personal income and financial security.

“What really hinders investment is not the cash constraints of companies that pay too much tax, but rather this is an overall weakness in demand,” said Kimberly Clausing, an expert on economic policy and tax policy at Reed College.

As for reducing offshore investment, studies have shown the opposite to occur. The tax audit includes several new provisions that actually make it more desirable for U.S. multinationals to invest in tangible assets abroad because that would give them greater tax breaks.

From the start, many economists questioned the wisdom of imposing deficit-funded cuts when the economy grew at a steady pace.

Almost always in the past, the federal government used massive tax cuts only during setbacks, when they could give the economy a much-needed ride in consumer and business spending.

“At the time, it looked a little bit cruel that we had to run a deficit of almost a trillion dollars while we were more or less at the top of the business cycle,” said Nicholas Eberstadt, a political economist at American Corporation. The institution.

Not only did the tax cuts not provide the benefits Trump and the Republican Congress promised, they left the country with a large budget hole that had just become much bigger than the economic pandemic shocks that occurred once a century.

“That is a big mistake that we see now because we now have less fiscal space than we have to fight the current crisis,” said Marc Goldwein, senior policy director for the Committee for Responsible Federal Budget.

He noted, for example, that it was no longer an option to offer certain tax incentives for businesses to invest and stimulate the economy, such as full expenses for the purchase of factories and new equipment, because it was already included in the 2017 law.

Goldwein estimates that without a 2017 tax cut, the country will have an additional $ 500 billion to fight the current health and economic crisis. While it might not look like much compared to the $ 3 trillion that was agreed in the pandemic assistance by Congress, it will make a difference in the future, he said.

“Over time, the structural deficit might sort of create extra fatigue that makes it more difficult for us to support the economy,” Goldwein said. “And allowing us to spend an additional $ 500 billion on more support for the economy, that would be a big problem.”

In the field of trade, some economists say the gains in business investment promised from tax cuts did not materialize in part because of the uncertainty created by Trump’s nearly two-year trade war with China.

After months and more and more negotiations and several rounds of tit-for-tat tariffs, the US and China announced a trade agreement in January in which Trump got some of what he was looking for, at least on paper. Beijing promises to increase purchases of U.S. goods and services by more than $ 200 billion over two years.

But the so-called Phase 1 agreement delayed for several days later critical issues such as China’s policy to subsidize and support state-owned companies.

Many analysts said at the time that China was not likely to follow through on the promised increases in purchases, including U.S. soybeans. and other agricultural crops hard hit by trade wars.

Now the COVID-19 pandemic has made large-scale purchases even less likely.

The pandemic has seriously disrupted the global trade and supply system. And the bad intentions created over the past two years from trade friction with China – as well as with many allies, including Germany and Canada – put the US in a worse position when the pandemic struck.

Most immediately, trade tensions complicate Washington’s ability to secure critical surgical masks, goggles, gloves and other protective equipment, most of which originated in China.

The N95 mask was among the products from China which were hit with a 15% tariff in September. The tariff was halved when the US-China trade agreement took effect February 14, however It was only on March 17 that the remaining assignments were deleted, said Chad Bown, trade expert at the Peterson Institute for International Economics.

“They are caught in a trade war,” Bown said. “It certainly hurts your readiness when something like this happens.”

Trump can claim credit for having renegotiated the North American Free Trade Agreement, and while his tariffs on many products from trading partners help lift some domestic producers such as steel companies, the benefits sometimes don’t last long and there is considerable collateral damage to other industries.

“It’s not that he doesn’t achieve anything, but they are significantly offset by costs,” said William Reinsch, a veteran trade analyst and senior adviser at the Center for Strategic and International Studies.

What’s more, economists worry that the Trump First America strategy will prove expensive in terms of effectively responding to interrelated health and economic challenges.

“The whole world is fighting the same thing now,” Bown said of COVID-19, “and in a sense we will never be safe until the pandemic everywhere is under control. So the idea that we will somehow isolate ourselves from the world by only worrying we are very petty now. “

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