Capitalism in the U.S. has become a principal economic system, after replacing all other economic systems that include commodity production and slavery. Capitalism has transformed the class structure, leading to competitive capitalism and monopolistically competitive capitalism. Change is always at the center stage of capitalism that even the presidential candidates in the U.S. do not succeed in their campaigns without mentioning change. Although the policy priorities of President Trump are unpredictable, his administration is perceived to be weighing up an attempt to a Reaganomics, a system of the Eighties that focused on reducing government spending and marginal tax rates. An attempt to adopt a Reaganomics in a capitalist nation would prove to be a costly practice for the lower social classes.
After clinching to power in November 11, Trump administration is contemplating on adopting the Reaganomics, where the highest marginal income-tax rates are expected to be slashed while tax on corporate income is also going to be cut. According to The Economist, tax analysts have indicated that Trump’s tactic is likely to cut annual federal-tax revenue by at least 4% of the GDP. However, a Reagonomics strategy is likely to harm the American economy by creating a financial instability. The U.S. tactics of supporting developing countries would encounter a shortage of funds under Reaganomics while the battle of exchange between the U.S. and China is likely to ensue due to the pressure on the dollar. Trump should be warned that the boost promised by tax cut should not be distributed uniformly across the country, as the level of inequality today is much higher than it was in the Eighties. Cutting tax rates on wealthy individuals and creating financial regulations is likely to trigger economic divisions to an unimaginable level.
The U.S. is already economically divided owing to capitalism. The social structure of accumulation has created competitive capitalism where private ownership is on the rise, and the highest social class is largely concerned with operations that accumulate maximum profits. Inequality in the U.S. is quite high, which makes it hard to spread the economic benefits equitably (“That Eighties Show” n.p). The stimulating effect of tax cut is that money will be spread to the masses, but in a capitalist society, the rich would withhold the money and invest on business that would not benefit the lower social classes directly. Under the Wilson administration in the 1920s, tax cuts resulted in huge sums of money being placed in tax shelters instead of being channeled into the private economy to create employment and enhance output (Sowell 2-3). Reaganomics under Trump would make rich people ultra-rich while the number of the poor would shoot up because much of their income would go to taxes.
A tax cut incorporates a decline in taxes, and its effect is that it minimizes government revenues, but boosts the real income of individuals who are affected by the cut. Thus, Trump’s policy is that people should have more income for themselves rather than depending on the government to offer them free services. Trump’s economic policy is supported by the “trickle-down theory”, which is built on the notion that economic behavior would change, leading to more output, high income, and higher tax revenues (Sowell 1). However, the attempt to cut tax rates on the affluent is an indication that poor individuals are to carry the tax burden because they gain more from the state services than the rich. Scholars perceive the trickle-down theory as a benefit for the rich because they benefit directly from the tax cut. Tax cuts have negative impact on the poor because the government is likely to cut on some expenditure that benefits the poor directly. Such policy is immoral and discriminating, as it would benefit a few individuals who belong to the highest social class.
Although tax stimulus is likely to trigger high demand, which would consequently nurture economic growth, tax cuts are a threat to the financial stability due to high interest rates. High interest rates are likely to create a financial burden to developing countries owing to high dollar-denominated loans. In the 1980s, debt defaults, as well as restructuring caused American banks to experience huge losses, leading to limited loans (“That Eighties Show” n.p). Higher interests may create a crisis through a capital flight, which could compel the federal government to implement capital controls.
Trump’s attempt to adopt a Reagonomics strategy of the 1980s is likely to create a financial crisis due to the declined government expenditure and inequality in resource allocation. Although Trump could be having a long-term view of the macroeconomic policy, his opponents view the strategy as exceedingly discriminating, as it would benefit the rich. Capitalism in the U.S. has managed to divide citizens into social classes, based on their income. Trump’s policy of tax cut would affect the lower social classes because they do not have much to save, and the tax cut will not have any significant effect on their living standards. On the other hand, high income earners would benefit from high investments, considering that the capitalists’ aim is to maximize profits with minimum costs.
“That Eighties show.” The Economist. Nov. 19, 2016, http://www.economist.com/news/finance-and-economics/21710253-donald-trumps-attempt-reaganomics-will-prove-costlier-original. Accessed 3 Dec. 2016.
Sowell, Thomas. Trickle Down Theory and “Tax Cuts for the Rich. Hoover Institution Press, 2012. https://books.google.co.ke/books?id=EY3prsH-5bwC&printsec=frontcover&dq=trickle+down+theory&hl=en&sa=X&redir_esc=y#v=onepage&q=trickle%20down%20theory&f=false