Tax Reform Truth Squad: Facts And Honest Answers

  • August 11, 2017 6:15 PM ET

The battle for major growth-inducing tax reform has started and already the Democrats and progressives are engaged in all they seem to know: class warfare and the politics of envy.

Last week, Senate Democrats proclaimed that they will not support any tax reform that cuts federal income taxes for the top 1% of income earners. They seem to forget that when President Kennedy came into office, the top 1% faced a 91% top marginal rate. Kennedy cut tax rates across the board by about 23%, which left the top 1% with a 70% top rate. The economy consequently boomed during the 1960s, until President Johnson imposed an income-tax surcharge on the richest taxpayers in 1968.

The latest federal income tax data show that the top 1% of income earners pay 39.5% of all federal income taxes, nearly twice the 20.6% share of national income they earn. It is time to rethink this burden and recognize that excessive taxation is a drag on the entire economy — and all our people — not just those who pay it directly.

The economy today is still more than $2 trillion below where it should be under the pre-recession economic-growth trendline. That is because Obama’s economic policies were consistently anti-growth, directly opposite those of President Reagan’s. “Reaganomics” produced a historic, record-shattering 25-year economic boom from late 1982 to 2007.

Despite Charles Schumer, Nancy Pelosi, Elizabeth Warren, Bernie Sanders and the other practitioners of the politics of envy, capital investment is the foundation of economic growth, prosperity, job creation and rising wages. It takes capital investment to start new businesses, expand existing ones, finance wages until the business starts earning profits, and pay for tools and equipment to make workers more productive.

Increased productivity is what finances higher wages. Demand for increased labor from the establishment of new businesses and expansion of existing ones bids up wages also, but it is increased productivity that produces the funds to pay those higher wages.

Investors, however, need incentives to invest their capital. The top 1% of income earners have vast stores of capital that they can invest. But high taxes on investment returns discourage them from making investments in the first place. Hence, no new businesses, no new jobs, no higher wages, no economic growth.

Liberals seem to have no sense of the reality of human nature and incentives. In ObamaCare they exempted from employer coverage those employees working 30 hours per week or less. Surprise: an explosion in part-time jobs.

In the tax reform battle, Trump supporters and traditional conservatives must be armed with the facts and arguments to do a better job than we did in the ObamaCare fight. Our side will be accused of being “toadies” of Wall Street and the rich. We must be armed with the facts and persuasive responses. That is where the “Tax Reform Truth Squad” can play a decisive role. Here are some claims of the left and our responses:

“A reduction in the corporate tax rate just helps Wall Street and the rich.”

  • The U.S. corporate tax rate of 35%-plus is the highest in the developed world and drives companies and jobs offshore.
  • International studies confirm that 70 to 90 cents of every corporate tax dollar paid is borne by workers in reduced wages and foregone jobs.

Reducing the “pass-through” tax rate to sole proprietors, LLCs and other noncorporate business owners is just rewarding the rich.”

  • Fairness dictates comparable business tax rates so rate differentials don’t influence the choice of business forms.

“The double taxation of American corporations operating abroad is fair because both the country in which they operate and the U.S. deserve tax revenues.”

  • We must establish a “territorial tax system” like the rest of the world in order to be competitive: Taxes flow only to the nation in which the profits are earned.
  • We can bring home trillions in new investment now stranded overseas with a one-time low 10% rate on earnings already taxed abroad. This may “seed” U.S. infrastructure improvements as urged by Trump.

“Immediate year expensing of capital investments should not replace depreciation schedules. That cuts tax revenues in favor of Wall Street.”

  • The Tax Foundation’s dynamic modeling of the economy confirms that the single most powerfully pro-growth “tool” in the tax cut “toolbox” is immediate-year expensing of capital investments.

This is just the beginning of the Tax Reform Truth Squad education and arguments. More will be forthcoming.

  • Uhler is Founder and Chairman of the National Tax Limitation Committee and National Tax Limitation Foundation (NTLF). He was a contemporary and collaborator with both Ronald Reagan and Milton Friedman in California and across the country.
  •  Ferrara is a senior fellow with the Heartland Institute and NTLF, and principal and general counsel for the Raddington Group, an international economic consulting firm. He served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the United States under President George H.W. Bush.

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