Congress Makes Big Progress On Pro-Growth Tax Reform

The so-called “do nothing Congress” is making amazing progress toward major, pro-growth tax reform. Last week the House passed a budget (first time in over a decade), enabling us to use reconciliation (51 votes) in the Senate for tax reform. Just before that, the Trump administration joined congressional tax writing committees to issue a “Unified, Pro-Growth, Republican Tax Reform Plan.”

The architects of “progressivism” (Schumer, Pelosi, Sanders) continue their chant that we are “toadies” of Wall Street and want to cut taxes for the rich. Their left wing “intellectual” apologists like the Tax Policy Center claim that our tax cut proposals will dramatically reduce federal tax revenues, increase our national deficits and debt, and bankrupt America. Yet, these are the very same people who applauded Obama’s anti-growth policies and trillions in additional debt.

These so-called “progressives” still haven’t gotten the message of the last election. Working people and their families want growth, not Third World-style stagnation.

Too many on both the left and right are unnecessarily exercised about the possible net revenue loss of the Republican Unified Tax Reform Plan. Reagan cut rates for everyone by 25%, but the resulting booming growth made the plan more than revenue neutral, actually revenue positive, as federal revenues doubled while he was president.

Federal revenues were $517 billion in 1980, the year before Reagan entered office. Reagan’s tax cuts started the next year, 1981, when total federal revenues rose to $599 billion. By 1984, after Reagan’s rate cuts had already become law, federal revenues totaled $666 billion.

But federal revenues continued their upward climb, to $734 billion in 1985, $769 billion in 1986, $854 billion in 1987, $909 billion in 1988, and $991 billion in 1989, the year after Reagan left office, nearly double 1980 revenues.

President Kennedy similarly cut rates for everyone by about 23%, and the booming economy that followed created revenue-positive results the very next year. The fundamental economic truth is when the economy is rising, revenues will be rising, regardless of the rates. And when the economy is declining, revenue will be declining, regardless of the rates.

These are historical facts, not opinion. And those who do not understand them should not pretend to be practicing economics.

Comparing Reagan’s 1981 tax rate cuts with currently considered reforms, you can see how much more dynamic current proposals are, with so many more pro-growth reforms.

One of the biggest problems for the U.S. economy is America’s hopelessly outdated corporate tax rates, with the top rate nearly a world-leading 40% (counting state corporate taxes on average). Top corporate rates in Asia average half that at 20.1%, Europe less than half at 18.9%. The Republican tax reform proposes to cut the top federal corporate rate to 20%, leaving the total rate close to 25%, counting the states.

The Republican Unified Plan proposes a special, “pass through” rate of 25% to apply mostly to small businesses organized as limited liability companies (LLCs), partnerships, sole proprietorships, Subchapter S corporations, etc. These smaller businesses are taxed today at standard personal income tax rates of up to 39.4% — which is effectively more than 44%, counting phase-outs of varying tax provisions.

For individual taxes paid by workers, the current seven income-tax rates are replaced by three: 12%, 25% and 35%. That does not involve increasing the current 10% rate to 12%, as fake news outlets have reported. The doubling of the standard deduction and increased child tax credit effectively reduce that 10% rate to zero at all income levels to which that 10% applies today.

The Unified Plan also repeals the multiple taxation of capital involved in the death tax and the alternative minimum tax (AMT). The plan also proposes to repeal some itemized deductions primarily used by the wealthy, as only 5% of taxpayers actually itemize.

That should include the deduction for state and local taxes, which only encourages higher state taxes. Repealing that deduction would cause states to reduce their taxes and spending.

The Unified Plan also involves “expensing,” or an immediate deduction for capital investment, just like for all other expenses for the production of income. Current law requires capital investment to be deducted over many years, as many as 30, under arbitrary “depreciation,” which expensing would replace.

That extended depreciation discourages capital investment, which provides the foundation for increased jobs at higher wages. Tax Foundation studies show that such expensing has very powerful pro-growth effects.

The U.S. economy recovering from recessions grows faster for a few years, until it returns to where it would have been at America’s normal 3% to 4% annual growth. That full recovery from the financial crisis never happened under President Obama. But with pro-growth tax reform and deregulation under President Trump, we can expect growth of 5% to 6% for a couple of years, as happened under Reagan and Kennedy.

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