Why liberal economists are wrong about Republican tax reform
I am a Tennessean and a Republican. I know, respect and have supported both President Donald Trump and Senator Bob Corker. They are good, patriotic men.
Despite their ongoing personal feud, Senator Corker announced that he is “all in” on President Trump’s and Republican leadership’s tax reform efforts, which produced the tax reform bills recently released in the House and Senate. The senator’s constituents like me sincerely appreciate his putting aside personal differences for the good of the country.
Corker also indicated that he will only support tax reform that eliminates trillions of dollars in loopholes to ensure reform is deficit neutral. One significant loophole allows taxpayers to deduct what they pay in state and local taxes from their gross income for federal tax purposes. As a result, taxpayers in low-tax states like Tennessee pay a higher percentage of their income in federal taxes, subsidizing the lower percentages residents of high-tax states like California and New York pay.
With our debt exceeding $20 trillion, Corker’s deficit concerns are justified. He is right to fight for the elimination of unfair loopholes. But as this process proceeds, it’s important to keep in mind other ways to achieve deficit-neutral tax cuts. It’s also important to keep in mind that America’s working and middle classes, largely passed over by Obama’s tepid economic recovery, need tax reform.
These Americans would keep more of their paychecks under the Republican House and Senate bills. For instance, the House plan would make the first $24,000 of their earnings tax free, eliminate the 15 percent bracket and expand the child tax credit.
For many small businesses, tax rates would decline from 40 percent to 25 percent. For very small businesses they would fall to just 9 percent on the first $75,000 of earnings.
The survey and economic evidence indicate that these businesses would direct part of their tax savings to worker raises. The highly respected White House Council of Economic Advisers recently forecast that the House tax plan’s business cuts would increase annual incomes for American households between $4,000 and $9,000 over time, further increasing the benefits for American families.
Tax cuts also incentivize economic growth by keeping more money in communities where it produces growth and less in Washington D.C. where it does not. The CEA forecasts that the plan’s business tax cuts alone would increase GDP by between 3 and 5 percent over projections of continued Obama-era growth of less than 2 percent.
History suggests the CEA is right. Both Presidents Ronald Reagan and John Kennedy cut taxes and significantly increased growth.
Reagan cut taxes across the board ushering in 4 percent-plus economic growth in four of the next five years. For the three years following Kennedy’s tax cuts, GDP growth exceeded 5 percent.
At such growth rates, the proposed tax cuts would more than pay for themselves.
Kennedy’s and Reagan’s records make it clear that, when analyzing the impact of tax cuts on deficit spending, Republican senators should rely on more realistic “dynamic” models that factor in economic growth. Merely returning to the historical average of 3 percent economic growth would generate more than $2.5 trillion in additional revenue, offsetting the cost of the proposed tax cuts.
Progressive economists rely on “static” models to defeat tax cuts. Such models operate under the bizarre premise that tax cuts have little or no impact on economic growth. It’s like a baseball team devising a strategy to increase run production and then analyzing whether to implement that strategy by assuming it will not increase run production. The result is obvious before you do the analysis.
Similarly, analyzing tax cuts designed to generate significant economic growth by assuming they will not generate growth is absurd, historically and economically unjustified, and intended to produce a predetermined result. It is a ruse. No one should fall for it.
With only regulatory reform in place, third-quarter Gross Domestic Product growth just came in at 3 percent, the first time we have had consecutive quarters of economic growth exceeding 3 percent since 2014. Just imagine the growth potential if Congress enacts tax reform.
The American people need and appreciate Senator Corker’s continued support.
Andrew F. Puzder is the former CEO of Nashville-headquartered CKE Restaurants and a member of the Job Creators Network.