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Republican tax bill passes: What it is and why it is great for America.

Written By | Dec 20, 2017

WASHINGTON, December 20, 2017:  Today, both the House of Representatives and the Senate passed the federal income tax reform bill. Now the House and Senate Republicans are heading to the White House to, as much as they do, celebrate.

A Republican bill without Democrat support

The GOP unanimously supported the bill while not a single Democrat voted in favor.  What’s in the bill and are the Republicans right that the new tax code will be great for America?

There are currently seven tax brackets.  Six of the rates fall with only the lowest 10% rate staying the same. Every taxpayer except for the lowest income earners will see a rate deduction.

The lowest income earners will get a larger standard deduction, so their tax bill will fall too.

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 SALT (State and Local Tax) deductions

For taxpayers who live in states with high state and local taxes (SALT), the deduction will fall, meaning many could pay more in taxes.  These are people who have been paying less than their fair share since SALT has reduced their federal income tax liability for years.

This reduction in SALT will likely put pressure on State and local governments to control cost and keep taxes down.

Child Tax Credit and Mortgage Interest

For families with children, the child tax credit doubles from $1,000 to $2,000 for all middle-class taxpayers. There is a limit to the mortgage interest expense deduction which will hurt people with very high mortgage expenses.

This tax cut will result in soaring economic growth.

It’s about increasing economic growth

Increasing economic growth is really the purpose of this tax cut.  By reducing the corporate tax rate to 21% and by reducing tax rates for US companies’ capital earned and currently held outside of the US, the tax bill creates vast amounts of new capital needed for economic growth.

In addition, the tax rate for non-corporate business owners, mostly small business, will fall, giving those firms more capital.  Those lower rates coupled with faster write-offs for investment will lead to massive increases in investment leading to high growth rates in GDP.

Tax Reform repeals Obamacare mandate

Lastly, the individual mandate requiring healthy people to purchase health insurance is repealed, although Obamacare surcharges on capital gains and the Obamacare increased Medicare taxes remain.

The increased economic growth will increase the demand for labor which will raise wages, provide better opportunities for tens of millions of underemployed Americans and lure millions of discouraged workers back into the labor force.  This increase in both labor and capital will fuel an economic boom likely lasting perhaps 5 years or more.

How high will economic growth get?

After the similar Kennedy/Johnson tax cut in 1964, economic growth averaged 6.5% for the next five years.  Following the Reagan tax cut in 1982, economic growth hit more than 7.5% in 1984.  After each of those tax cuts, tax revenue did not fall and, in future years, increased at a faster rate than before the tax cut. This tax cut will not add to the deficit.

Past Economic Slow Growth

The US economy has been stuck in a slow growth pattern since 2005.  Historically, growth in GDP averages about 3.5% annually.  In the last 11 years, economic growth has been averaging just over 2%.  That is the longest period of economic stagnation in US history.

Thanks to President Trump eliminating burdensome regulations, instilling confidence in the consumer and business sectors and by increasing Americans wealth, economic growth has already increased, reaching 3.1% in the second quarter of 2017 and 3.3% in the third quarter.  Preliminary data suggests growth in the current quarter will exceed 4%.

If fourth-quarter growth hits 4.4%, then GDP will have grown by 3% for the year, something not seen since 2005.  Once this tax cut is fully implemented economic growth will likely be 4.5% to 5% in 2018 and could go as high as 6% or more in future years.

The rising tide will lift all boats.

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Future Economic Prosperity

Economic prosperity will return and solve most of the economic problems that we face today.  Workers will have better higher paying jobs, increasing their income and their standard of living.  As the economy grows and corporate profits increase Americans retirement and other investment accounts will significantly increase in value.   Government spending on income maintenance programs like welfare and food stamps will fall dramatically as fewer able-bodied Americans need government handouts.

Social problems will also be minimized likely seeing crime rates fall and even illegal drug activity will be reduced because there are fewer idle Americans.

The cut is a win for all Americans even if initially some taxpayers may pay more taxes.  But as President John F. Kennedy said, “Ask not what your country can do for you.  Ask what you can do for your country.”

A high growth economy will provide an opportunity for Americans to improve their plight while helping the country prosperously move into the future.

Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.