Thoughts on a Pro-Growth National Tax Reform Program

President Trump’s tax reform program is in stark contrast to critics on the Left who still want a tax system that redistributes income to those who will be denied opportunity by an ideology that deplores capitalism, fears economic growth, and sees national greatness as malevolent.

blue_logo By William R. Hawkins l September 13, 2017

Trump’s ‘Main Street’ tax reform pitch in Springfield, Missouri

There is much to like in President Donald Trump’s outline of tax reform as presented in his speech in Springfield, Missouri on August 30 (and supported by talking points posted September 6). However, it will be up to Congress to draft his ideas (and those of its leading members) into legislation, so the devil will be in the details as the process unfolds. The standard to judge whatever reaches the President’s desk was set out clearly along Route 66: “We need a competitive tax code that creates more jobs and higher wages for Americans.” Central to this goal, “to renew our prosperity, and to restore opportunity, then we must reduce the tax burden on our companies and on our workers,” said President Trump. It is a business-oriented project meant to push annual economic growth to 3% or more, the anticipation of which has propelled the stock market to record highs. It is in stark contrast to critics on the Left who still want a tax system that redistributes income to those who will be denied opportunity by an ideology that deplores capitalism, fears economic growth, and sees national greatness as malevolent. The most important element in Trump’s plan is to cut the Federal corporate income tax, which at 35% is among the highest in the world. As the President stated, “Over the past 30 years, the average business tax rate among developed nations fell from 45 percent to less than 24 percent. And some countries have an unbelievably low tax, including, by the way, China and some others that are highly competitive, and really doing very well against us.” A study by the nonpartisan Congressional Budget Office released in March found that the U.S. corporate tax “was 10 percentage points higher than the average (weighted by gross domestic product, or GDP) of the top rates in the other G20 countries.” A cut to 15%, as the President proposes, would put the U.S. rate below that of any other G20 country. It is widely held that corporate taxes reduce capital investment, which is the lifeblood of economic growth. It is also an exercise in double taxation. Corporate profits have two uses: they can be reinvested to expand the business or they can be paid out in dividends to stockholders. In the latter case, they are subject to the individual income tax. Cutting the corporate tax, thus, does not mean that this flow of income will escape taxation if it goes into private pockets. But it will provide an incentive to plow profits back into the enterprise, generating new capacity, productivity and job opportunities. It makes so much sense that there are rumors many Democrats would support a reduction, if allowed by their leadership to vote for true progress rather than merely “resist” everything, the country be damned. Senator Heidi Heidkamp (D-ND) hitched a ride home onboard Air Force One when President Trump made a speech on tax reform in Bismarck on September 6. President Trump opened his Missouri remarks by calling for a simplification of the tax code to make it easier to file, but there was more to it than that. A key part of reform would be to eliminate special interest loopholes, which generally benefit high-income taxpayers (a reform Trump acknowledged would harm his personal interests but would be good for the country). He said, “Our tax system should benefit loyal, hardworking Americans and their families.” This goal does not mean eliminating all deductions; indeed, he has called for doubling the standard deduction which would primarily help the middle and working classes. The mortgage deduction will also stay, both because it is popular and because it serves a high social purpose, particularly from a conservative perspective. A system that values property rights needs to rest on a broad base of property owners. Having a true home roots a family in the local neighborhood and the larger national community. Raising the tax credit for children is justified on the basis of the cost of child-rearing but it will also encourage family growth, something needed to reverse decades of negative demographic trends. Abortion rates have dropped to the lowest level since 1973, a trend that should be supported by pronatal policies. For too long, welfare programs have encouraged the break up of families by subsidizing out-of-wedlock births, generating a myriad of moral and social problems. It is long past time to reward traditional family behavior by recognizing the costs of child-rearing and helping families keep enough of their hard-earned money to meet those costs. Education is among those costs, and allowing parents to write off the expense of sending their children to higher education programs (whether at colleges or vocational schools) would be good social policy as well as good economic policy. Whether one pursues a white collar or blue collar career, gaining more knowledge and skills is a necessity. Trump’s budget proposal also calls for six weeks of paid leave for new parents, including for adoptions. Reducing tax benefits from education will only make the Left’s campaign for “free” higher education look more attractive. But “free” schools still cost taxpayers money, much of which will be wasted as students abuse the “free” concept to pursue dead end programs. Families with students who have “skin in the game” will have to make more rational choices about career paths to insure their investments in schooling pay off. Both they and the economy will benefit from more realistic decisions. Eliminating once and for all the inheritance “death” tax is also family friendly. Given today’s extended lives, family assets are normally the result of the actions of multiple generations. That heirs have a greater inherent right to family property than does the government should be recognized. It is also extremely disruptive to force families to break up a business, liquidate assets or sell off land to pay estate taxes. Trump’s trade tariffs There was, however, one large omission from Trump’s declared agenda: tariffs. It has been reported that the President has told his cabinet that he wants tariffs to fulfill his pledge to bring jobs back to America. Tariffs are a tax that has generated major flows of revenue throughout history. It is levied on foreign goods that are imported, displacing domestic production and jobs. Critics claim it is really a tax on American consumers, but then all taxes on business, wherever located, fall on consumers since no business ever collects the money to pay its taxes except from those who buy its goods. There should be little sympathy for those who buy imports. If they want to continue enriching foreign rivals and putting people to work overseas rather than here at home, let them pay more for their bad behavior. The idea, however, is to give American producers a competitive edge in their own country’s market (the largest in the world). The U.S. government should do more than just give its citizens “a level playing field” (which they do not currently have); they should give citizens a “home field advantage.” Loyalty is a two-way street. Lowering the corporate tax rate and raising tariffs both serve the same purpose; making domestic production and job creation more competitive against foreign rivals. The hope is that lower tax rates at home will entice the return on trillions of dollars “parked” overseas. That capital is needed to build and modernize American-based industry and fund new innovations. Having a “protected” home market to make those investments more secure will also draw in capital, including from foreign firms that will want to locate facilities in America to also benefit from the tax reforms. And, any gains in post-tax family incomes should be directed at boosting the American economy, not sent overseas to buy imports. There is concern that tax reform will expand the dangerously high budget deficits which have pushed the aggregate national debt to $20 trillion. The Trump budget plan calls for a balanced budget by 2027 but that depends on many variables, including a return to high national growth rates and significant cuts in non-defense discretionary spending. And the time horizon is too distant. In the short run, tariffs would generate more tax revenue to cover cuts like corporate tax reduction. In the long run, of course, protective tariffs would reduce imports and thus the flow of tariff revenue. But as that happens, the domestic tax base would be growing as production shifted back home. Thus, adding protective tariffs to the American Model (actually returning tariffs to the model that propelled U.S. growth through most if its history) makes fiscal sense as well as economic sense. Is comprehensive tax reform possible? There is one final principle that should be followed: the net result should be neutral in terms of generating revenue. It should be remembered that the reason taxes exist is to pay the costs of government. Running deficits may be necessary in an emergency (war or recession), but should be considered only temporary evils. Running deficits on the current scale when the economy is running normally with low unemployment, will serve as a drag on growth. Every dollar consumed by the government to fund the debt is a dollar not available for capital investment in the productive private sector. Tax reforms meant to raise more capital for growth will be subverted if that capital is used merely to fund Federal consumption. Expenditures and taxes must not be kept separate in the minds of either legislators or voters. There must be a balance. If the public expects government to perform certain duties, it must be prepared to pay the bills. The task is to decide what methods of tax collection do the least harm to the underlying economy upon which everyone depends. As president Trump has said, this is the first time in 30 years when comprehensive tax reform (not just tinkering with rates) may be possible. It must be done right from a national perspective.