Trump Tax Reform Plan Offers Promise of Long Overdue Booming Economic Recovery
Milton Friedman, the greatest economist of the 20th century, was the first to notice this historical pattern of the U.S. economy – the deeper the recession the stronger the recovery. That is because the U.S. economy grows faster than normal for a while to catch up to where it would have been without the recession.
Based on that standard, the U.S. economy should have come out of the steep 2007-2009 recession in a booming recovery, similar to Reagan’s recovery coming out of the steep 1981-82 recession in an historic boom that lasted 25 years. But today, 8 years after the last recession ended, no such recovery has happened.
Instead, during Obama’s entire 2 terms in office, economic growth in the U.S. averaged less than 2 percent. Measured by wage and income growth, jobs, poverty, and inequality, Obama’s economic performance adds up to the worst recovery from a recession since the Great Depression.
Real annual U.S. growth averaged 3.3% during the postwar era, covering the last now 70 years at least. Given how steep the 2007-2009 recession was, real economic growth should have clocked in at 5% or even 6% for a couple of years, like Reagan’s did.
What is most exciting about Trump’s tax reform plan is that it holds the potential to ignite precisely such booming growth, just as the Kennedy and Reagan tax reforms did. See Larry Kudlow’s latest book, JFK and the Reagan Revolution: A Secret History of American Prosperity. Lower marginal tax rates provide incentives for increased capital investment, which is what creates new jobs paying higher wages.
Most promising in that regard is the proposed Trump business rate tax cuts, to 15% for corporations, and “pass through” businesses, like Subchapter S corps, Limited Liability corps (LLCs), partnerships, sole proprietorships, etc. U.S. corporate tax rates today are the highest in the industrialized world at nearly 40%, counting state corporate income tax rates on average. That has become an anchor dragging down the American economy.
But as The Wall Street Journal editorial board has asked in a recent column: “Where is the message that cutting corporate tax rates will lift incomes, which the economic literature clearly shows? And where are the waves of surrogates out making the case and rallying supporters to reinforce it!” They are exactly right: we must have the right message and create a veritable national “cheering section” to educate our fellow Americans about the potential for the future with major corporate tax rate reduction and other business and personal tax reforms.
Studies show that as much as 90% of corporate and business taxes come at the expense of reduced jobs and lost wages for workers. Those studies are why countries across Europe have so aggressively cut their corporate tax rates over the past 25 years, by about 50%, bringing top marginal tax rates for corporations and businesses in the EU down to 18% on average. Trump’s corporate and business tax cuts would reverse the negative effects of corporate taxes, creating millions of new jobs and restoring real wage growth.
U.S. corporations are holding nearly $3 trillion in capital overseas to avoid the double taxation that would occur under current law, taxing it at the world leading U.S. tax rates in addition to the foreign taxes already paid on that money when it was earned abroad. Trump’s tax reform proposes to adopt territoriality for U.S. taxes, which means that taxes would be paid only in the country where the profits were earned.
That would end the problem of hoarding profits offshore for the future. For currently held offshore funds, Trump’s tax reform proposes a one-time corporate tax of 10% on funds brought home. That would bring back those overseas corporate profits for U.S. investment, further creating jobs and restoring rising real wages.
Another powerfully pro-growth reform in Trump’s plan is to replace depreciation, which requires deductions for capital investment to be arbitrarily spread over many years, with expensing, which would allow capital investment to be deducted in the year the expense is incurred, just like for all other business expenses. That is a direct encouragement and incentive for capital investment, leading directly to the creation of new jobs, and acquisition of the capital tools that increase productivity, which earns the funds to pay for increased wages.
Trump’s tax reform proposal includes abolition of the now 100-year-old estate “death” tax, which has been a totally unnecessary drag on our economy, while producing less than ½ of 1% of US tax revenues annually. His proposal would also eliminate the Alternative Minimum Tax (AMT) and cut the capital gains tax. Those provisions would all sharply reduce the multiple taxation of capital in the current tax code, further liberating capital investment, jobs and rising real wages.
As economist and Trump economic advisor Steve Moore has said recently in The Wall Street Journal, only rapid growth of the private economy can solve our national debt problem. At 4% growth, the size of our US economy doubles every 17 years. And cutting unemployment insurance and imposing “work” requirements for welfare will greatly expand our workforce, which is essential to maximizing economic growth.
With the CBO demonstrating that it is not able to calculate such growth, under either static or so-called dynamic estimates, there is no sense to risk losing all that growth by striving for supposed revenue neutrality. America needs a tax cut to restore essential booming growth, and that would nullify the economic problems threatening the most successful economy in world history. (933 words).
Lewis Uhler is the founder and President of the National Tax Limitation Committee and the National Tax Limitation Foundation. He was a contemporary and collaborator of both Ronald Reagan and Milton Friedman. Peter Ferrara is a Senior Fellow of the Heartland Institute, and a Senior Policy Advisor to NTLF. 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