WASHINGTON: Last week, the House Ways and Means committee approve Tax Reform 2.0, including several tax reform bills. These bills now move to the full House of Representatives where approval is likely. Then the bill moves to the Senate where it will take 60 votes to pass. The Senate vote will occur after the election next month. Unless the GOP can get 60 Senate seats the tax reform bill will die in the Senate.
Even with 60 GOP Senators, the bill may not pass the house because of a cap on deductions for homeowners.
The Tax Reform 2.0 bills have three parts.
Tax Reform 2.0 will make parts of last year’s tax reform bill permanent. Temporary tax cuts set to expire in 2025 will be made permanent as will the $10,000 cap on deductible homeowner expenses. Also, temporary deductions for pass-through business would become permanent.
Important for families unable to save money due to the last administration’s policies, the new Tax Reform bill encourages family savings by creating tax-deferred savings accounts. Finally, the bill increases deductions for new businesses to encourage innovation.
All three parts of the bill are generally seen as positive. However, some believe that the deficit will increase.
A possible deficit increase of $60 billion per year
The Congressional Budget Office estimates that this bill will increase the deficit by just over $60 billion per year. So is this a good idea?
It is a good idea because tax cuts do not cause deficits.
I repeat tax cuts do not cause deficits. Opponents will say after the Reagan tax cut in 1981, deficits soared. Taxes were cut for this year. The result being that the deficit grew by more than $400 billion.
However, after the tax cut in 1981, tax revenue was higher in all of the subsequent years. Taxes were cut this year, and for the first half of 2018, tax revenue increased by about 1% over last year.
Deficits increased because government spending increased. That’s what happened in the 1980’s as Reagan spent to re-build the military and that happened again in 2018.
If Congress could control spending, the deficit would not have grown.
Tax cut 2.0 should lower the capital gains tax rate.
Prior to President Obama’s huge increase in government spending, the capital gain tax rate was 15%. Shortly after passing the Affordable Care Act and the Dodd/Frank bill, tax rate increases of 20% and for some higher income earners, up to 23.8%.
President Trump’s primary economic policy goal is to increase economic growth. Through an executive order, President Trump oversaw the reversing of hundreds of counter-productive and growth-stifling regulations imposed by the Obama administration.
By April 2017, just over two months since the inauguration, the economy was growing at more than a 3% annual rate.
Last November, Trump convinces Congress to reduce income tax rates for all individuals.
The President also convinces Congress to repeal portions of the growth-stifling Dodd/Frank bill. The changes went into effect in January 2018. By April of this year, the economy started growing at more than a 4% rate.
The next step to have growth go even higher is to reduce the capital gains tax rate back to 15%. This would stimulate non-inflationary economic growth. And it would result in the government collecting more revenue from the capital gains tax.
In 1997 President Clinton reduced the capital gains tax rate from 28% to 20%. The result was that the somewhat sluggish economy grew at a 4 1/2% annual rate for the next four years.
And tax revenue from capital gains increased substantially every year.
That’s because the lower rate ended up creating more capital for growth. As the economy grew and capital investment increased, total revenue increased. After all isn’t 20% of $1,500 ($300) greater than 28% of $1,000 ($280).
The opposition to Tax Reform will claim this is just another tax cut for the wealthy.
That is true. But it is true because capital gains taxes are mostly from the top 20% of earners. If the goal is to raise tax revenue to increase economic growth, taxes have to be cut for the people who actually pay the taxes.
The entire economy benefits by increased tax revenue and an even higher rate of economic growth. It is clearly a win-win situation.
Tell Congress to cut the capital gains tax rate as part of Tax reform 2.0.
-Headline Cartoon: Ben Garrison, GrrrGraphics.com