On Trump’s Tax Reform

If there was any sign that the American economy needed an injection of pro-growth policies, it is the latest GDP report. The economy grew by only 0.7 percent in the first quarter of 2017. While it is typical for first quarters to be sluggish, it is also the result of the multitude of economic problems. Consumer spending slowed to 0.3 percent, which could be attributed to a warmer winter and the more long-term effects of unstoppable premium increases due to Obamacare.

There’s also the matter of business inventories, which declined by about 1 percent in the quarter, though the good news is that businesses did increase spending on long-term projects and there’s been a surge of confidence since President Trump’s victory in November.

As the Wall Street Journal editorial board has pointed out, Trump and the Republicans in Congress need to act quickly in order to shatter the slow growth dilemma the country faced under President Obama. “This is why the GOP’s deregulation agenda is so critical, and tax reform that spurs investment even more so,” they write. “The disappointing first quarter shows there’s no time to waste.”

Thankfully, the GOP is not wasting time. Trump rolled out an excellent tax reform proposal that will do exactly what’s needed to fuel economic growth. For businesses, the tax rate is reduced from 35 percent to 15 percent. The tax rate for “S corporations” (those that file under the individual tax code) would also see their rate lowered to 15 percent from 39.6 percent. There’s also an end to double taxation on overseas profits.

In addition to a large tax cut on businesses, the individual income tax rates will be reduced to three from seven. The new rates will be 10 percent, 25 percent, and 35 percent. Standard tax deductions will be doubled to $6,350 for individuals and $12,700 for married couples filing jointly. Some deductions like those for mortgage interest and charitable contributions will be kept, but others will be eliminated to simplify the code. Lastly, the Alternative Minimum Tax and the estate tax will be repealed.

If this plan is implemented, the economic benefits will be felt across the country. Let’s start with the corporate tax. The United States has one of the highest corporate tax rates in the world, only below those of the United Arab Emirates, Chad, and Puerto Rico. In a globalized world, higher taxation damages our competitiveness with other nations. Trump’s tax cut would make the American corporate tax rate one of the lowest in the world and would lead to great economic output and higher incomes for workers.

Then there’s the Laffer curve. Named after Arthur B. Laffer, an economist who advised President Ronald Reagan, the curve concludes that lower tax rates actually create more revenue in the long run by providing the incentive for businesses to invest their capital in the United States and using it for the purposes of expansion, higher wages, and hiring more people.

Many of America’s leading competitors have embraced lower corporate tax rates and want to continue to do so. A paper published by the Australian Treasury in May 2016 analyzed the long-term effects of tax cuts. They found that cutting the corporate rate from 30 percent to 25 percent would increase gross national income by 0.7 percent. This comes from higher labor compensation for workers and capital income for investors.

Then there’s the United Kingdom. The Centre for Policy Studies published a new report that has found that there has been an increase in corporate tax revenue despite large reductions from a rate of 52 percent in 1982 to 20 percent now. The increase in tax receipts is the result of a stronger British economy and higher profitability for companies. It has encouraged an increase in capital investment, boosted British gross domestic product, and driven up wages.

Our northern neighbors also understand the recipe for growth. As pointed out by William McBride of the Tax Foundation, the corporate tax rate in Canada has collapsed from over 50 percent at the start of the 1980s to under 30 percent now. During this period, corporate tax revenue as a share of GDP increased from 2.9 percent over the years from 1988 to 2000 to 3.3 percent since then.

Paul Ryan has always been concerned with America’s tax competition compared to that of other nations. He is right to explain the differences. The United States has to follow this route or else it will continue to be plagued with economic stagnation. Trump’s corporate tax cut will do exactly that.

His policy with income taxes is also a vast improvement from that of the last administration and would help millions of Americans the same way Reagan’s policies did. Reaganomics increased real median family income by $4,000 after no growth during the malaise years of Jimmy Carter. It created 17 million new jobs. This is a record that should be repeated.

Those who will say that Trump’s tax policies would be a giveaway to the rich ignore history and ignore the plan. The Democrats are firing up the old talking points again, but they were wrong in the past and they will be wrong this time. The unequivocal truth is that this plan will improve the economy for everyone as it has with similar policies in our past and as it has in other countries. Every Republican should support this bill.

- John M. Graber, Jr.

Be the first to comment

Please check your e-mail for a link to activate your account.