Sharply reducing income tax rates was the first step in Reagan’s economic recovery plan, which produced a record 25 year economic boom, from late 1982 to late 2007. As Art Laffer and Steve Moore wrote in their 2008 book, The End of Prosperity,
“We call this period, 1982-2007, the twenty-five year boom – the greatest period of wealth creation in the history of the planet. In 1980, the net worth – assets minus liabilities – of all U.S. households and business…was $25 trillion in today’s dollars. By 2007…net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.”
Reagan reduced the top income tax rate from the 70% he inherited to 28%, first with the Kemp-Roth 25% across the board rate reduction, then through the 1986 tax reform. One more rate – 15% — applied to the middle class.
Reagan’s tax reforms abolished federal income taxes altogether on lower middle income workers and the working poor, raising the portion of federal income taxes paid by the top 1% from 17.6% in 1981, all the way to 40.4% by 2007, almost twice their share of adjusted gross income. Despite Reagan’s sharp reductions in income tax rates, federal revenues doubled in the 1980s, because of the resulting booming economic growth.
Trump proposed a revised tax reform plan in his September 15 economic policy address before the Economics Club of New York. That new plan is based on the tax reform plan proposed by House Speaker Paul Ryan’s Tax Reform Task Force, led by House Ways and Means Chairman Kevin Brady (R-TX).
The new Trump tax reform plan adopts the same three income tax rates of the Ryan-Brady plan – 12%, 25% and 33%, replacing the 7 income tax rates in the current tax code, which includes a top rate of well over 40%. The 12% rate would apply to married couples filing jointly up to $75,000 a year; the 25% rate applying up to $225,000; the 33% rate to incomes above that. Those rates apply to singles at half those incomes.
The Trump plan would increase the standard deduction for married joint filers from $12,600 to $30,000, for singles to $15,000. That ensures the plan would involve a substantial tax rate cut for everyone, mimicking the Reagan reforms. Itemized deductions would be capped at $200,000 a year for married joint filers, $100,000 for single filers.
The 3.8% Obamacare tax on investment income would be repealed, as would the Alternative Minimum Tax (AMT) and the death tax. That would leave the tax on capital gains and dividends at 0% for those paying the 12% ordinary income rate, 15% for those paying the 25% ordinary rate, and 20% as the top rate. But a 15% top rate would be more consistent with the rest of the plan. Carried interest would be taxed as ordinary income.
Most importantly, Trump’s tax reform would reduce America’s 35% federal corporate tax rate, highest in the world at nearly 40% counting state corporate income taxes, to nearly the lowest in the world at 15%, less than the proposed Ryan-Brady rate of 25%.
Ryan-Brady includes the same 25% rate for businesses taxed as “pass through” companies. Those are Subchapter S Corps, Limited Liability Corps (“LLC’s”), partnerships, sole proprietorships, etc. These tend to be smaller businesses, which actually produce the most new jobs.
There has been some confusion over whether the Trump plan would apply its 15% corporate rate to these passthroughs as well. We are assured by Trump economic policy advisors that Trump’s plan would include that 15% pass through rate. But this will ultimately be determined by Congress, with Ryan and Brady leading the way.
The plan would eliminate corporate tax credits and most tax expenditures, except for the Research and Development Tax Credit, which would be retained. The plan would allow manufacturing firms to take immediate expensing (deductions) for capital investment, instead of depreciation which extends the deductions over several years. Such expensing should be expanded to all firms, because experience shows that would provide a powerful boost to capital investment, which is critical to job creation and wage and income growth.
Just as with the Reagan tax reforms, Trump’s lower rates on everyone would promote new jobs, rising wages and incomes, and long overdue booming recovery and growth. The Tax Foundation scores the plan dynamically over 10 years as creating over 2 million new jobs, increasing capital investment by 23.9% and wages by 6.3% over the baseline, with higher economic growth increasing GDP by 8.2%.
Counting that growth, the plan would involve a tax cut of $3.9 trillion over the next 10 years. Trump’s energy deregulation and repeal and replacement of Obamacare would promote even faster growth. His trade policies can be implemented in ways that would promote faster growth as well. With such growth, feasible spending restraint can balance the budget within 10 years, as accomplished by the policies implemented under former House Speaker Newt Gingrich.
Given the long term stagnation under President Obama’s policies, such tax and spending cuts are sorely needed now. But Hillary Clinton is promising just the opposite, $1.5 trillion in further tax increases, maintaining and even increasing the world’s highest tax rates on American corporations and capital investment, and trillions more in increased federal spending.
Long experience with Mrs. Clinton’s policies and rhetoric shows that she has no concept of how to lead America to booming economic recovery and growth. Her stated policies would just keep America on the long term path towards becoming a Third World country that Obama’s stubbornly retrogressive policies are producing. If the recent immigrants to America she claims to champion wanted that, they would have stayed home.
Lew Uhler is Founder and Chairman of the National Tax Limitation Committee and National Tax Limitation Foundation (NTLF), who worked for Ronald Reagan when he was Governor of California and President. Peter Ferrara is Principal and General Counsel of the Raddington Group, an international economic and political consulting firm, Senior Policy Advisor to NTLF, and a Senior Fellow for Entitlement Reform and the Budget at the Heartland Institute. He formerly served in President Reagan’s White House Office of Policy Development and as Associate Deputy Attorney General of the United States under President George H.W. Bush.