TAXATION

Relearning the tax cut lesson

The U.S. has been slow to adopt tax policies it taught other nations

– – Tuesday, October 24, 2017

ANALYSIS/OPINION:

Since President Reagan’s tax reforms of the 1980s, other countries around the world have been cutting their corporate tax rates and other taxes on businesses. As a result, American companies and their workers suffer today with the highest corporate tax rates and other business taxes in the developed world. What do these other countries understand that America does not?

The average corporate tax rate in Asia today is 20.1 percent; in Europe, 18.9 percent. America’s federal corporate rate is 35 percent, nearly 40 percent counting state corporate taxes on average. America’s noncorporate businesses face tax rates of more than 40 percent.

What these other countries understand is that corporate and business taxes are actually borne mostly by workers through lost jobs and wages. That is what the best studies and economic models show. And these other countries have all followed the latest economics, increasingly leaving America and its workers falling behind.

One of the best economists on these tax issues today is Boston University’s Larry Kotlikoff, who recently explained in a post at Forbes that Republican tax reform is actually, after economic effects, “a tax on consumption purchased out of wealth.” He writes, “the ‘Republican’ business tax plan imbeds a subtle, but major tax on wealth, which neither Republicans nor Democrats seem to get.”

Mr. Kotlikoff explains further, “The corporate tax is actually a hidden tax on workers since it leads companies to move their capital and jobs abroad, thereby lowering U.S. wages.” So-called Republican tax reform “effectively [involves] moving from taxing wages to taxing wealth — a Democrat’s tax reform dream come true.”

Mr. Kotlikoff’s latest model shows the tax reform plan “would quickly raise the stock of U.S. capital by roughly 20 percent, GDP by roughly 7 percent, and real wages by roughly 9 percent. Moreover, the economy’s dynamic expansion generates enough extra revenue to offset static revenue losses.”

That and more is what happened with President Reagan’s tax cuts, President Kennedy’s tax cuts, even the tax cuts of Presidents Harding and Coolidge in the 1920s. Other countries get this today, from Great Britain and France to Russia and China. But not in America, because we got throwbacks Bernie Sanders and Elizabeth Warren standing athwart the march of history and yelling, “Stop!”

Mr. Kotlikoff’s models are actually used today by the Congressional Budget Office and the Joint Tax Committee, as well as by economists from around the world. So they do not involve a partisan Republican plot. Their actual innovation is to recognize that capital in today’s globalized world economy moves in one giant, worldwide market, and no longer stays tamely in localized pens.

Former Harvard University economics professor Larry Lindsey similarly recently wrote in The Wall Street Journal: “The tax reform package now working its way through Congress aims to address the reasons that the current economic recovery has been the most anemic on record. Both history and economics suggest that most of [the resulting] additional growth will accrue to workers in higher real wages.”

He added, “In 1964, Congress enacted a tax cut that similarly encouraged capital formation and entrepreneurship. It cut the top personal rate by 21 points. It cut the corporate rate and introduced accelerated depreciation. The result was a boom that went on for the rest of the decade.” That was the Kennedy tax cut, passed by a Democratic Congress.

Mr. Lindsey concluded, “When a supply-side tax bill like this is passed at a time of full employment, labor’s share of the economic pie expands rapidly. That happened after passage of the 1964 bill, and it will happen again if the current tax reform becomes law.” The tax reform bill, he added, “would lead to the first sustained decline in income inequality in more than 40 years. The American economy will finally start working in the interest of the great middle class and not simply those at the top.”

Columbia Business School Dean Glenn Hubbard responds to tax reform criticism from the Tax Policy Center that “oddly assumes no growth whatsoever — and why enact tax reform at all in that case.” The Tax Policy Center demands that tax reform be distributionally neutral as well as revenue neutral.

That would ensure that tax reform is also growth neutral, and not worth doing. The current tax distribution is what caused President Obama’s tax increases on “the rich” to lose $3.2 trillion in revenues over 10 years, instead of the originally misestimated increase of $680 billion.

When are Chuck Schumer, Bernie Sanders and Elizabeth Warren going to finally catch up to President Kennedy? Maybe after voters apply another lesson in the 2018 elections.

• Lew Uhler is founder and president of the National Tax Limitation Committee and the National Tax Limitation Foundation. Peter Ferrara is a senior fellow at the Heartland Institute and a senior policy adviser to the National Tax Limitation Foundation.

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