Why Tax Reform Will Lead To BOOMING Economic Growth

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Peter Ferrara Contributor
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The tax reform bill now pending in Congress will be very pro-growth, like President John F. Kennedy’s tax cuts passed in the early 1960s, and the tax cuts and reform that President Ronald Reagan led in the 1980s. All of America will benefit from that soaring growth, and the long overdue end of long-term stagnation, where America has been stuck for a decade now.

Presidents Kennedy and Reagan fundamentally fixed the individual, worker side of the tax code, as Lawrence Kudlow and Brian Domitrovic explain in their recent book, “President Reagan and the Reagan Revolution: The Untold Story of American Prosperity.” When Kennedy entered office, the top income tax rate was 91 percent. He reduced that to 70 percent, and then reduced all the other tax rates by an equivalent percentage — roughly 23 percent — as well.

But that did not result in a 23 percent reduction in income tax revenues, which would have been the static estimate not considering resulting economic growth effects. Instead, revenues rose as the economy boomed for the rest of the 1960s, until Nixon’s tax increases and monetary policy chaos (cutting the dollar’s tie to gold) cut the boom short.

Reagan then cut the 70 percent rate down to 50 percent, and then applied his 25 percent income tax rate reduction to all the rest of the rates as well. In Reagan’s 1986 tax reform, the top income tax rate was cut to 28 percent, with just one more rate of 15 percent for the middle class.

The economy took off on a 25 year boom, from late 1982 to late 2007. More wealth was created during those 25 years than in all prior years in American history combined, from George Washington to Jimmy Carter. Despite those dramatic income tax rate cuts, federal revenues doubled while Reagan was president, because of the booming growth.

By the end of the 1980s, some 20 million new jobs had been created, and real wages were rising again. During the first 7 years of the boom, the U.S. economy grew by the equivalent of adding the entire economy of West Germany, the third-largest in the world at the time, to the U.S. economy.  By the time the 25 year boom ended in late 2008, the recovery had created 50 million new jobs, restoring robustly rising real wages along the way.

This year’s tax reform now focuses on the business side, where the real economic problem lies today. America’s corporate income tax rates, 40 percent counting state rates, are uncompetitive in today’s global economy. In Asia, corporate rates average 20.1 percent; in Europe 18.9 percent. The “pass through” rates for smaller businesses – partnerships, sole proprietorships, Limited Liability Corps (LLCs), Subchapter S Corps – are even higher, over 40 percent.

The tax reform would reduce the federal corporate rate to 20 percent, with a new special pass through rate of 25 percent. That would make America competitive again.

Boston University’s Larry Kotlikoff explains: “The current corporate tax is actually a hidden tax on workers since it leads companies to move their capital and jobs abroad, thereby lowering U.S. wages.” The Republican tax reform plan “effectively [involves] moving from taxing wages to taxing wealth – a Democrat’s tax reform dream come true.”

Kotlikoff’s latest model shows the Republican tax reform plan “would quickly raise the stock of U.S. capital by roughly 20 percent, GDP by roughly 7 percent, and real wages by roughly 9 percent.  Moreover, the economy’s dynamic expansion generates enough extra revenue to offset static revenue losses,” meaning that the tax reform will pay for itself through higher economic growth, just like Kennedy and Reagan’s tax reforms did.

This modern economics is why Europe and Asia have cut their corporate tax rates so much in recent decades. Why must America be so far behind the curve?

Also very pro-growth, the tax reform bill provides for immediate expensing (deductibility) for capital investment in tools and equipment, just as for all other expenses for the production of income. The bill also makes American businesses internationally competitive by joining the rest of the world in providing for territoriality in taxation of American businesses abroad, with income taxed by the country where it is earned.

Today income earned abroad by American companies is double taxed if it is brought home to America for investment. American companies consequently hold nearly $3 trillion overseas, where it creates jobs and rising wages for workers in other countries. Tax reform would provide for a repatriation rate of 10 percent, bringing those trillions back to create jobs and rising wages for Americans.

The mere promise of pro-growth tax reform has already led to a more than 50 percent increase in economic growth under President Trump, from less than 2 percent on average under President Obama to 3 percent the last two quarters. Everyone used to recognize booming stocks as a leading indicator of future growth.

Moreover, the American historical record is the deeper the recession the stronger the recovery, as the economy grows faster than normal for a few years until it returns to its long-term economic growth trend line, as first recognized by Milton Friedman. By this metric, the economy should have come out of the bitter 2008-09 Great Recession in a booming recovery.

But today 8 years after that recession ended, that booming recovery still has not happened! Instead, what we got under Obamanomics was the worst recovery from a recession since the Great Depression.

That booming recovery is consequently still lying dormant in this economy, waiting to break out. Liberated by pro-growth tax reform, that recovery can reach annual growth beyond the long term standard 4 percent for a couple of years or so, like it did under Reagan and Kennedy. (939 words).

Peter Ferrara is a Senior Fellow at the Heartland Institute, and Senior Policy Advisor to the National Tax Limitation Foundation. 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.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.