WASHINGTON, September 27, 2017 — President Trump has released his plan for tax reform. Given economic conditions today, the goals of tax policy and taxpayer frustration with the current tax code, Trump’s plan is a definite winner for all Americans.
The first goal of any tax plan should be to stimulate economic growth. The economy has not seen annual growth above 3 percent since 2005. That is the longest period of economic stagnation in U.S. history. It is the cause of most of our current economic and social problems.
Trump’s plan will increase growth to at least 3 percent annually, and possibly beyond 4 percent. This is the case since he intends to lower the corporate tax rate from 35 percent to 20 percent. Corporations will have more investment capital, and investments that may not have been profitable will suddenly become profitable.
He will especially lower tax rates for small businesses who create the vast majority of new jobs.
The next goal should be to raise sufficient revenue to pay for government expenditures. Cutting taxes could reduce tax revenue for the next year or two, but as the economy grows, tax revenue will grow at a faster rate. This was the case after major tax cuts like the Kennedy-Johnson tax cut in 1964, the Reagan tax cut in 1981, and the Clinton capital gains tax cut in 1997.
But didn’t deficits increase after each of those tax cuts?
Deficits increased because government spending increased at a much faster rate than tax revenue. After the 1964 tax cut, tax revenue increased every year, sometimes as much as 10 percent. The increase in the deficit was because annual government spending increased by 50 percent from 1964 to 1968.
After the 1981 tax cut, economic growth reached 7.6 percent in 1984. Tax revenue was 10 percent higher in 1985 than in 1984. The deficit increased because annual government spending increased by 30 percent from 1981 to 1986.
After the 1997 tax cut, tax revenue increased by 30 percent by 2000. Government spending increased by only 11 percent, and the budget ran a surplus.
Tax cuts do not cause deficits. Increased government spending causes deficits. Trump will control government spending, so the deficit will be reduced.
The next goal should be to simplify the tax code. By eliminating complex deduction rules, increasing the standard deduction and reducing the number of tax brackets, the tax code becomes simpler and easier for the average person to complete the tax forms without professional help.
Elimination of deductions also removes any market distortions. Although not suggested by Trump, removing the home mortgage interest deduction and the deduction of state taxes would remove two major market distortions.
The last goal is to have a policy that is viewed as fair and equitable. Since Trump is not dumping the entire code but rather making changes to it, his changes should be evaluated for fairness.
Trump wants to double the standard deduction which favors lower income earners and well as the middle class. He wants to reduce the number of tax brackets and raise the income limits for each bracket. This too favors lower income earners and the middle class.
Trump wants to lower the top personal income tax rate from 39.6 percent to 35 percent. His critics say that this is just another tax cut for the wealthy. That’s a bunch of poppycock.
In 2001 President Bush lowered tax rates for all Americans by 10 percent and the top rate ended up being 36 percent. The tax cuts were temporary and expired in 2011. President Obama decided to make the tax cuts permanent for all Americans except the highest income earners. For them, the rate went back up to 39.6 percent.
Trump just wants to bring it back down to just below where it was in 2011. Setting high rates on the highest income earners reduces the amount of capital going into the economy which tends to slow growth.
Don’t we want growth to increase?
While Trump’s plan is not perfect and will have much opposition, especially from those who claim this is just a tax cut for the wealthy, American taxpayers should wholeheartedly support the President. Economic growth will increase substantially, new opportunities will be available to American workers, tax revenue will accelerate, spending on social programs will decline as the need declines, it will be easier to complete the tax forms and there will be fewer market distortions.
Who would really oppose those outcomes?