Just As With Reagan, Getting Tax Reform Right Today Is Key To Booming Economy

Published April 17, 2017

President Trump inherited an economy as troubled as the one Reagan faced in 1981.  Reagan entered office after a long period of economic stagnation and meager growth, the economy struggling to recover from repeated recessions.

Milton Friedman was the first to observe that the deeper the recession, the stronger the recovery.  After a recession, the economy grows faster than normal for a period until it catches up with where it should have been on the long term economic trendline.

The recession Obama inherited in 2008-09 should have been followed by a booming recovery for at least a couple of years with real growth of 5% or even 6%, like President Reagan’s recovery from the steep 1981-82 recession.

But Obama never produced more than 2% growth per year for his entire 8 years in office. That qualifies as the worst recovery from a recession since the Great Depression. That means there is an economic boom still hiding deep within this economy, waiting to be liberated.

Reagan’s first step to restoring economic growth was to reduce tax rates sharply.  Reagan first cut income tax rates for everyone by about 25%, similar to Kennedy’s tax cuts in the 1960s. The Reagan cuts were first scored as a big tax revenue reduction.

Then in the Tax Reform Act of 1986, Reagan and Congress, including Democrats, cut income tax rates for everyone again, promoting further growth. But this reform was scored as revenue neutral, with loopholes closed to offset the supposed revenue losses from the rate cuts.

The bottom line result was an historic, 25-year economic boom from late 1982 to 2007.  Despite the sharp reduction of the top marginal income tax rate from 70% to 28%, federal tax revenues doubled while Reagan was president.

Trump/Ryan-Brady can generate the same result for the American economy today.  But, given the delay in repealing/replacing Obamacare, the need for Congress to deal with budget issues and uncertainties with respect to tax reform elements, it may be better to bifurcate tax reform and concentrate on business/investment tax reform first.

Trump proposed to reduce the top federal corporate tax rate to 15%, transforming America’s tax code from the highest corporate tax rate in the industrialized world to one of the lowest. This would result in an historic boom in wages and jobs, as studies confirm that as much as 90 cents of each corporate tax dollar comes out of lost wages and jobs for workers.

This is the economic reality.  We must communicate this to American workers, overshadowing the Soros/progressive lies that this is simply a payoff to Wall Street and the rich.

More investment and economic growth would result from adopting a territorial corporate tax system, where income is taxed only once — in the country where it is earned — as with the tax system in most other countries.

The current outdated tax code has resulted in close to $3 trillion in U.S. corporate profits — on which foreign corporate taxes have been paid — remaining “offshore” to avoid double taxation at the 35% US rate.  Trump has proposed a new rate of 10% on those profits to encourage their return to the U.S. for investment in America, further creating new jobs and rising wages — and possibly seeding a U.S. infrastructure renewal.

Concurrently with the corporate tax rate reduction, the so-called “pass through” tax rate for unincorporated small businesses should be reduced to no more than a 5% “spread” from the corporate rate, so that with the tax on dividends to corporate share owners, the total tax burden on businesses — corporate, sole proprietorships, LLCs, etc. — is equal or close to it (tax law should not “dictate” nor influence the business entity chosen by the owners/entrepreneurs).

Dynamic scoring economic models of the Tax Foundation confirm that adopting expensing rather than depreciation for capital investment — providing an immediate deduction for such investment in the year it is made, as with all other business expenses — would serve as perhaps the most powerful source of economic growth and increased jobs and wages. Trump and Congressional Republicans favor that as well.

Finally, after 100 years, we must kill the “Death Tax”, which is manifestly unfair and yet another layer of taxation on investment capital — and double taxation at that. Such capital remaining in the private sector will be the foundation of increased jobs and wages for working people.

These tax reform issues demonstrate why it is Republicans today, not Democrats, who now best represent working people. That is why working people are realigning to Republicans today, fundamentally transforming American politics.

[Originally Published at Investor’s Business Daily]