TAXATION

After GOP’s Alabama Loss, Republicans’ Tax-Reform Choices Become Even More Important

LEWIS K. UHLER and PETER J. FERRARA

The loss of the Alabama Senate seat just reinforces the message to Republican tax reform conferees all the more. Your job is to “maximize the positive,” economic growth for America, which Congressional Democrats — none of whom support tax reform — will rue on election day 2018.

At every fork in the road (policy choice), you should “spend” the $1.5 trillion tax cut lid (as allowed by absurd Congressional budget rules and the official — always wrong — “bean counters” of the Congressional Budget Office and Joint Committee on Taxation to whom you are held hostage) to pursue the most powerful economic growth choices.

No Hidden Agenda: Get News From A Pro-Free Market, Pro-Growth Perspective

When the economy booms, tax revenues soar and deficits shrivel, not grow.  This is why it is so short-sighted to make compromises in the tax reform bill that undermine growth, supposedly to reduce the deficit:

In the Senate bill the corporate rate cuts go into effect in 2019. The effective date needs to be moved to 2018, as in the House bill, so that economic growth launches immediately.

While the tax reform bills reduce the corporate rate to 21%, smaller businesses organized as “pass-throughs” receive a 17.4% deduction in the Senate bill, which leaves the ultimate rate paid over 30%. It is important to restore “pass-through” parity with corporate rates, which can be done by also cutting the top individual rate to 35%, further promoting growth.

In the Senate bill the death tax is never repealed but continues to “finance World War I.” The pro-growth effects of repealing this unfair and grossly unpopular tax completely were recently demonstrated in Sweden, where businesses, capital and jobs that had fled started returning as soon as the death tax was repealed.

The Senate bill retains the Alternative Minimum Tax (AMT) for individuals, and adds a new one for corporations. Both have the perverse, anti-growth effect of nullifying expensing (immediate deduction for capital investment rather than years long depreciation).  Such expensing has one of the most powerful pro-growth effects of anything in the bill, as the Tax Foundation has tirelessly explained.

Meanwhile Conferee responsibilities require that they concurrently “minimize the negative,” adjusting those policy choices that anger our base, with limits on home mortgage interest deductions, education tax benefits, and state income-tax deductions (zeroing out this deduction over four years would placate some blue state Congressional Republicans, while giving grassroots time to mobilize state tax insurrections back home).

Plus “first in, first out” stock shares taxation hurts small investors particularly.  Much better to reduce the capital gains rate to 15%, increasing revenue from that source, as proven during the Bush II Administration.

If tax reform is done right, it will promote economic growth, as it did under both Presidents Kennedy and Reagan, and will increase revenues by far more than the $1.5 trillion over 10 years that the “bean counters” calculate it will lose.

Most voters do not know that Kennedy and Reagan mostly fixed the individual side of the income tax code, though since Reagan Washington has been backtracking.  But counting federal and state corporate tax rates, America now has the highest business taxes in the developed world, with corporate rates at nearly 40%, and pass-through rates even higher.

Many voters question why, despite all the talk about middle-class tax cuts, the focus seems to be reducing corporate and business rates.  Republicans need to pivot to explain effectively how the bill will benefit the middle class, blue-collar working people and millennials through higher economic growth, increased jobs and higher wages.

Boston University economist Larry Kotlikoff and colleagues have produced the most comprehensive, sophisticated economic model in America, if not the world.  Their model shows that cutting the corporate rate to 20% would draw $5 to $6 trillion in increased capital into America, increasing wages for the average family by $3,500 a year.  That means $35,000 over the first 10 years.

Their model also shows that the tax reform bill will not increase income or wealth inequality. Nor will it increase the deficit or the national debt as a percentage of GDP, due to booming growth in federal revenues.

This is most important of all for millennials, who will be living their entire lives either under the Obama era stagnation, or the new American Dream.  The rest of the world understands this.  Only Congressional Democrats remain united in their opposition, denying tax reform even a single vote. They will pay the price for that in November 2018 — and beyond.

Uhler is founder and chairman of the National Tax Limitation Committee and National Tax Limitation Foundation (NTLF). He worked with both Ronald Reagan and Milton Friedman.

Ferrara is a senior fellow with the Heartland Institute and NTLF. He served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the U.S. under President George H.W. Bush.

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