Trump’s Tax Principles A pro-growth outline that focuses on weak capital investment.
https://www.wsj.com/articles/trumps-tax-principles-1493246938
“The Trump principles show the President has made growth his highest priority, and they are a rebuke to the Washington consensus that 1% or 2% growth is the best America can do. Now Mr. Trump has to show results. If anything close to his this reform can survive the political maelstrom, it will go a long way toward returning to the abundance of the 1980s and 1990s.”
The White House rolled out its tax principles on Tuesday, investing new energy in the first serious reform debate in 30 years. While the details are sparse and will have to be filled in by Congress, President Trump’s outline resembles the supply-side principles he campaigned on and is an ambitious and necessary economic course correction that would help restore broad-based U.S. prosperity.
Many voters heard Mr. Trump’s make-America-great-again slogan as a promise to raise their incomes and improve economic opportunities after a long stagnation. Eight years of 2% growth since the recession ended in 2009 is the weakest recovery in the postwar era, and the result has been rising anxiety and diminished expectations for millions of Americans.
Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump’s modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. The reform would sharply cut the business income rate to 15% from 35%, while simplifying the code for individuals and cutting some marginal rates.
Though Mr. Trump’s proposal dabbles in some politically fashionable tax redistribution, at its core it is an exercise in growth economics. The cuts would be permanent and immediate, and the rates are low enough to enhance the incentives to work and invest.
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The plan also fits the economic moment, because a main source of U.S. malaise is poor business investment. Spending on the likes of new factories, equipment and software is soft, which in turn has undermined the productivity gains that produce more jobs, higher wages and higher living standards. Productivity growth in the 2000s and 2010s is only about half the average of the 1980s and 1990s.
One reason for this underinvestment—even though corporations have about $2.5 trillion parked overseas—is the uncompetitive and complex American tax system. The 35% statutory rate is the developed world’s highest, and an archipelago of credits, exclusions and deductions means the tax collects only about 11% of federal revenue, or roughly a meager 2% of GDP.
Slashing the headline rate to 15% would instantly lead to a surge in capital investment. Mr. Trump would make small businesses like S corporations and other pass-throughs that now pay through the individual tax code eligible for the 15% rate. Tax parity among all companies is a useful goal, not least because owner-operated companies are an engine of hiring and growth.
Increasing the capital stock will raise productivity. The economic literature conservatively suggests that about half of the corporate tax burden is carried by workers in the form of lower wages. In other words, moving to 15% is a national pay raise.
Another benefit is that the Trump plan would move to a territorial tax system, where U.S. companies pay taxes on income only in countries where it is earned. Businesses are now taxed on world-wide profits (less certain credits), which is why so many have moved headquarters overseas. The White House also endorsed a one-time required tax on profits earned abroad, the rate to be determined. A single-digit rate would be best and voluntary would be better.
On the personal side, the Trump plan would make the code more efficient by collapsing the current seven brackets down to three of 10%, 25% and 35%. The White House is still debating at which income levels these rates would apply. The plan would also double the standard deduction to $24,000, so fewer taxpayers would need to itemize.
A top marginal rate of 35% is progress over the status quo of well above 40% (including surcharges and phase-outs), though above the 33% rate that Mr. Trump proposed during the campaign. The President’s economic advisers are sensitive to the “tax cuts for the rich” label, though they’ll be pilloried for that no matter what they propose.
The Trump plan eliminates all deductions except for home mortgages and charitable donations. This killing spree includes political favorites like the write-off for state and local tax payments. This is a federal subsidy for high-tax New York, New Jersey, Oregon and California, but about 90% of these tax expenditures flow to taxpayers with adjusted gross income over $100,000. Depending on the specifics, the affluent could pay more.
But the economic evidence is substantial that lower marginal tax rates provide the biggest growth bang for the buck. The 1986 Reagan reform—the last major reform—cut the top rate to 28% from 50%, which sustained the 1980s boom. Growth averaged 4.8% in the six years after the 1981-82 recession and the growth effects continued to pay dividends into the 1990s. These have since dissipated as the tax code has been riddled with more and more rent-seeking dispensations.
Speaking of which, the White House affirmed new tax credits for families with children, and perhaps this is the price of fulfilling an Ivanka Trump-brand campaign promise. But such credits are expensive and do nothing for growth.
The Trump plan is silent on the House’s controversial 20% border adjustment tax, and perhaps that is more than the political bandwidth could bear. Retailers and other importers oppose a tax on imports, and the transition in practice—such as a rapidly appreciating dollar—could be rougher than economic theory suggests. But this means losing revenue of about $1 trillion that was supposed to offset the lost revenue from tax-rate cuts. Without border adjustment, or some other tax increase or budget cuts, the Trump plan will increase the deficit.
Thus the blueprint is being assailed from both the left and the balanced-budget right. The Trump economic team acknowledges that their plan would mean less federal revenue than current law under conventional Beltway score-keeping that assumes no increase in economic growth. But unlike in Washington, in the real world people and companies will change their behavior in response to better incentives, the economy will grow faster, and over time revenues will grow faster than without reform.
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We’ve been somewhat skeptical of Mr. Trump’s economic team, but Treasury Secretary Steven Mnuchin and National Economic Council chief Gary Cohn have delivered a supply-side outline that will unleash the pent-up productive capacity of U.S. workers and businesses. Credit is also due House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady, whose “Better Way” platform made tax reform a priority.
Mr. Trump’s plan is an opening bid to frame negotiations in Congress, and there are plenty of bargaining chips. Perhaps the corporate rate will rise to 20%, or maybe the House will include a more modest border adjustment. Budget rules and Democratic opposition could force Republicans to limit the reform to 10 years. But better to start with a big pro-growth offer rather than preemptively lower aspirations. Republicans won’t get another opportunity like this to reshape the tax code for a generation.
The Trump principles show the President has made growth his highest priority, and they are a rebuke to the Washington consensus that 1% or 2% growth is the best America can do. Now Mr. Trump has to show results. If anything close to his this reform can survive the political maelstrom, it will go a long way toward returning to the abundance of the 1980s and 1990s.
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