[THE VIEW] The Pros and Cons of Tax Cut Policies

Is the Trickle-Down Effect of Tax Cuts an Illusion?
Seven Years of Trump Tax Cuts... The Cost Is a $1.9 Trillion Fiscal Deficit
What the U.S. Tax Cut Debate Asks of Korea

The second term of U.S. President Trump has begun. During his first term, President Trump implemented large-scale tax cuts, and while the corporate tax rate reduction remains in effect, some individual tax cut provisions are set to expire gradually. This year, as new tax policy discussions have intensified in the U.S., studies on the overall economic impact of tax cuts have gained attention.

These studies also provide implications for tax policies in our country. Recently, the tax cut policies pursued by the Yoon Seok-yeol administration sparked considerable controversy. Policies such as the abolition of the financial investment income tax and the reduction of dividend income tax rates were criticized for primarily benefiting high-income earners. Plans to reduce the top inheritance tax rate from 50% to 40% were also pursued, but following President Yoon's impeachment motion, these tax cut initiatives have effectively been halted.

What impact did the U.S. tax cut policies have? The most prominent effect was the deepening of the fiscal deficit. The Congressional Budget Office (CBO) analyzed that due to Trump's tax cuts, tax revenue is expected to decrease by $1.5 trillion to $1.9 trillion over the next decade. Although Trump promised benefits for the middle class during his first term, research shows that over 80% of the actual tax cut benefits went to corporations or high-income individuals.

One of the main arguments supporting tax cuts is the "trickle-down effect" theory. This claims that tax benefits for high-income earners and large corporations lead to wage increases and job creation, ultimately providing economic benefits to the middle and lower classes. President Ronald Reagan's tax cut policies in the 1980s are a representative example.

However, Reagan's tax cuts failed to achieve the expected trickle-down effect and instead exacerbated income inequality. Recent studies indicate that Trump's corporate tax cuts also did not lead to wage increases or household income growth. Corporations primarily used the funds saved from tax cuts for shareholder dividends or executive bonuses. According to an analysis by the AFL-CIO, half of the corporate tax cut benefits went to business owners, 10% to executives, and the remainder to the top 10% of high-income earners.

Donald Trump, President of the United States. Photo by AFP Yonhap News

Since Trump's tax cuts were implemented amid significant asset inequality, they ultimately widened economic disparities between races. Studies show that under the same conditions of income, employment status, and marital status, Black individuals paid more taxes than White individuals. This is because Black people have relatively lower homeownership and stock ownership rates.

The benefits of property tax reductions are concentrated among homeowners, but Black individuals find it much harder to obtain mortgage loans compared to Whites. Even Black individuals with higher credit scores and incomes often face more difficulty securing loans or are subject to higher interest rates than Whites. Reductions in investment income taxes also disproportionately benefit Whites, who have higher stock ownership rates.

So, are there any successful cases of the trickle-down effect resulting from tax cuts? While theoretically possible, there are limited cases that have proven success in practice. However, some early-stage economic growth cases benefited from attracting businesses. In the 1980s Hong Kong and 1990s Ireland, tax cut policies positively influenced economic growth, but these also led to increased income inequality as a side effect. In conclusion, the trickle-down effect from tax cuts appears difficult to expect in reality.

Seo Boyoung, Professor at Indiana State University, USA

This content was produced with the assistance of AI translation services.