In the last four national elections, Americans made it clear that we won’t accept the economic stagnation we’ve suffered during this past decade. Obama’s policies of higher taxes and greater regulatory burdens suppressed economic growth to a dismal 1 ½ percent annual average – about half the post-war growth rate of three percent.
Reagan averaged 3 ½ percent annual growth by reducing the tax and regulatory burdens crushing the economy. The result: one of the greatest economic expansions in American history.
The Trump Administration has made significant progress on regulatory relief, as attested by rising wages, employment opportunities and consumer confidence. But tax relief is vital to finish the job.
The imperative should be clear. The American corporate tax rate of 35 percent is the highest in the industrialized world. True, lots of special interest loopholes to politically connected companies bring the average rate to 18.6 percent. That’s precisely the problem: companies that haven’t gotten these breaks have fled the country – taking trillions of dollars and millions of American jobs overseas. By closing the loopholes and lowering the rate to an internationally competitive 20 percent, economists tell us we can add $5 trillion to the American economy over the next decade (averaging $40,000 per family).
Those who dismiss this as “tax cuts for wealthy corporations” don’t understand the dirty little secret of corporate taxation: corporations don’t pay corporate taxes – they only collect them. The only people who pay corporate taxes are consumers (through higher prices), employees (through lower wages) and investors (through lower earnings – think pensions and 401(k)’s). Lowering the corporate tax rate not only means restoring America’s global competitiveness, it invariably translates into lower prices, higher wages and greater returns on savings and investments.
The personal income tax side is also important, and here, Congress is getting wrapped around the axle.
Simplifying America’s Byzantine tax code is needed and overdue – but every adjustment has the potential for unintended and often ugly consequences. The Joint Committee on Taxation warned this week that while most families will see reductions in their tax burdens in the bill’s current draft, others (particularly in high-tax, high-cost states like California) will suffer increases, particularly over time.
Congress should leave no taxpayer behind. Considering the looming deadlines to enact the bill, the hyper-partisan political environment and the complexities of the tax code itself, personal income tax simplification should wait for another day.
Congress should focus instead on the main objectives of tax reform: economic growth and tax relief for all families. This means leaving the current personal income tax structure in place while providing a permanent, uniform across-the-board reduction in the rates for all tax brackets. Using the current budget framework, we could reduce tax brackets between one and 1.35 percent, saving average families between $600 and $800 a year.
Regardless of what deductions or credits a family currently claims, their taxes would be guaranteed to go down. More importantly, this would reduce the marginal rate for all incomes, maximizing the benefit to the overall economy. Productivity depends on how much your next dollar is taxed.
The legislation that emerges from these deliberations will ultimately be judged by the prosperity it produces and the relief it brings to ALL American families. If it’s done right, the tax reform now taking shape in Congress can deliver that day. If it’s done wrong, we will have squandered the most important chance the American people have given us to materially improve their lives.