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Posts Tagged ‘Supply-side economics’

About one year ago, Scott Hodge authored a report explaining the mechanics and utility of the Tax Foundation’s Taxes and Growth Dynamic Model. He made a very persuasive argument about the need to modernize and improve the Joint Committee on Taxation’s antiquated revenue-estimating process by estimating the degree to which changes in tax policy impact economic performance. The use of “dynamic scoring,” Scott explained, would produce more accurate data than “static scoring,” which is based on rather bizarre and untenable assumption that the economy’s output is unaffected by taxation.

Conventional scoring treats this process as an exercise in arithmetic, whereas dynamic scoring makes the process an exercise in economics.

Since I’m a proponent of the Laffer Curve, I obviously applaud the Tax Foundation’s superb work on this issue.

And for those who doubt the value of dynamic scoring, I challenge them to come up with an alternative explanation for why rich people paid five times as much tax after Reagan lowered the top tax rate from 70 percent to 28 percent in the 1980s.

But the Laffer Curve isn’t the focus of today’s column. Instead, I want to address the argument that supply-side tax policy (i.e., lower marginal tax rates, less tax bias against saving and investment) is no longer important or desirable.

Writing for Slate, Reihan Salam argues that Donald Trump’s success is a sign that the traditional tax-cutting agenda no longer is relevant.

Why can’t his GOP opponents convince Republican voters that they would do a far better job than Trump of defending middle-class economic interests? …Trump has demonstrated its weakness and the failure of its stale policy agenda to resonate with voters. …The GOP can no longer survive as the party of tax cuts for the rich. …If Republicans are to win the trust of working- and middle-class voters who’ve grown deeply skeptical of their economic nostrums, they will have to do something dramatic: It’s time for the GOP to abandon its near-obsessive devotion to tax cuts that disproportionately benefit upper-income households. …The GOP elite has also yet to grasp that most voters simply don’t care as much about taxes as they did in the Reagan era. …the share of voters who consider their federal tax burden their top priority is a mere 1 percent. To break out of their tax trap, Republicans…should continue to back tax cuts for the middle class, and in particular for middle-class parents. But until the country sees large and sustained budget surpluses, there should be no tax cuts for households earning $250,000 or more.

I’m not an expert on politics, so I won’t pretend to have any insight on whether tax policy motivates voters. But from an economic perspective, assuming the goal is a faster-growing economy that creates broadly shared prosperity, it would be very unfortunate if Republicans abandoned supply-side tax policy.

In the Tax Foundation study, Scott succinctly summarized the issue.

The primary goal of comprehensive tax reform is economic growth. …It is critically important that lawmakers make the right choices that lift everyone’s standards of living.

And here’s what I recently wrote, specifically addressing the assertion that proponents of good policy simply want to help the “rich.”

…It’s not that we lose any sleep about the average tax rate of successful people. We just don’t want to discourage highly productive investors, entrepreneurs, and small business owners from doing things that result in more growth and prosperity for the rest of us.

But what are those “right choices” that “result in more growth and prosperity for the rest of us”?

The Tax Foundation points us in the right direction. Let’s look at some charts (updated versions of the ones in Scott’s report), starting with this estimate of how various tax cuts affect overall economic output.

As you can see, expanded child credits don’t have any positive impact on growth for the simple reason that they don’t alter incentives to work, save, or invest (they may be desirable for other reasons, however). Lower marginal tax rates lead to some added growth, particularly if the top rate is reduced since upper-income taxpayers have far greater control of the timing, level, and composition of their income. But the biggest growth effects come from lowering the corporate tax rate and reducing the tax code’s bias against new investment.

Now let’s take the next step.

If changes in tax policy lead to increases in economic output, that also means a greater amount of taxable income.

So the Tax Foundation also can tell us the degree to which the aforementioned tax cuts will change revenue after 10 years. As you can see, most tax cuts result in less revenue, but in some cases there’s a considerable amount of revenue feedback. And if policy makers shift toward expensing, the long-run effect is more tax revenue.

Now let’s look from the other perspective.

What happens to the economy if various tax hikes are imposed?

As you can see, some tax increases have relatively modest effects on economic output while others significantly discourage productive behavior.

And when you feed the growth effects back into the model, you then can see the likely real-world effect of those tax increases on tax revenue.

So if policy makers impose a relatively benign tax hike, such as scaling back the state and local tax deduction, they will collect a considerable amount of revenue. But if they increase top tax rates on personal income or corporate income, a lot of the projected revenue evaporates. And if they exacerbate the tax bias against new investment, the net effect is less revenue.

By the way, these charts show why the class-warfare tax policies of Hillary Clinton and Bernie Sanders are so misguided. The amount of economic damage per dollar collected would be ridiculous.

Such tax increases wouldn’t be good for rich people, of course, but the real lesson is that the rest of us will be adversely affected because of a slower-growing economy.

The bottom line is that poor people and middle-class people have much more opportunity and prosperity with a Hong Kong-style tax system instead of a punitive French-style tax system.

To conclude, let’s now consider a few caveats.

If you examine the broad measures of what causes prosperity, tax policy is just one piece of the puzzle. The burden of government spending also is important, as is trade policy, regulatory policy, monetary policy, property rights, and the rule of law.

So it’s possible for a nation to be relatively prosperous with bad tax policy so long as it has free-market policies in other areas. It’s also possible for a nation with a good tax system to be poor and stagnant if other economic policies are statist and interventionist.

But if the goal is faster growth and more broadly shared prosperity, why not seek good policy in all areas?

The bottom line is that supply-side tax policies can contribute to better economic performance. In an ideal world, those policies also are politically popular. But even if they aren’t, the policy-making community should strive to educate the populace on what works, not abandon good policy for the sake of short-term political expediency.

P.S. Even international bureaucracies acknowledge the Laffer Curve, which means they understand that changes in tax policy can lead to changes in taxable income.

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The long-term trend in China is positive. Economic reforms beginning in the late 1970s have helped lift hundreds of millions of people out of abject poverty.

And thanks to decades of strong growth, living standards for ordinary Chinese citizens are far higher than they used to be. There’s still quite a way to go before China catches up to western nations, but the numbers keep improving.

That being said, China’s economy has hit a speed bump. The stock market’s recent performance has been less than impressive and economic growth has faltered.

Is this the beginning of the end of the Chinese miracle?

If you asked me about six months ago, I would have expressed pessimism. The government was intervening in financial markets to prop up prices, and that was after several years of failed Keynesian-style spending programs that were supposed to “stimulate” growth.

But maybe my gloom was premature.

An article in The Economist examines the new “supply-side” focus of China’s leader (h/t: Powerline).

Mr Xi has seemed to channel the late American president. He has been speaking openly for the first time of a need for “supply-side reforms”—a term echoing one made popular during Reagan’s presidency in the 1980s. It is now China’s hottest economic catchphrase (even featuring in a state-approved rap song, released on December 26th: “Reform the supply side and upgrade the economy,” goes one catchy line). …Mr Xi’s first mentions of the supply side, or gongjice, in two separate speeches in November, were not entirely a surprise. For a couple of years think-tanks affiliated with government ministries had been promoting the concept (helped by a new institute called the China Academy of New Supply-Side Economics).

Sounds encouraging, though it’s important to understand that there’s a big difference between rhetoric and reality.

Talking about “gongjice” is a good start, but are Chinese officials actually willing to reduce government’s economic footprint?

Perhaps.

Their hope is that such reforms will involve deep structural changes aimed at putting the economy on a sounder footing, rather than yet more stimulus. …Mr Xi’s aim may be to reinvigorate reforms that were endorsed by the Communist Party’s 370-member Central Committee in 2013, a year after he took over as China’s leader. They called for a “decisive” role to be given to market forces

Wow, the communists in China want free markets. Maybe there’s hope for some of America’s more statist politicians!

All kidding aside, there’s some evidence that officials in Beijing realize that the Keynesian experiment of recent years didn’t work any better than Obama’s 2009 spending binge.

Here’s more from the article.

Those who first pushed supply-side reform onto China’s political agenda want a clean break with the credit-driven past. Jia Kang, an outspoken researcher in the finance ministry who co-founded the new supply-side academy, defines the term in opposition to the short-term demand management that has often characterised China’s economic policy—the boosting of consumption and investment with the help of cheap money and dollops of government spending.The result of the old approach has been a steep rise in debt (about 250% of GDP and counting) and declining returns on investment. Supply-siders worry that it is creating a growing risk of stagnation, or even a full-blown economic crisis. Mr Jia says the government should focus instead on simplifying regulations to make labour, land and capital more productive. Making it easier for private companies to invest in sectors currently reserved for bloated state-run corporations would be a good place to start, some of his colleagues argue.

This is music to my ears.

Assuming President Xi is willing to adopt the types of reforms advocated by Mr. Jia, China’s economy will have a very bright future.

The key goal for policy makers in Beijing should be to improve China’s economic freedom score over the next 10 years by as much as it improved between 1980 and 2005.

In other words, if China adopts genuine free markets like Hong Kong and Singapore (and, to a lesser extent, Taiwan), then it will simply be a matter of time before living standards reach – and exceed – levels found in western nations.

I’ll close by outlining two challenges for Beijing.

First, entrenched interest groups will be an obstacle to pro-growth reform. In this sense, politics in China is very similar to politics in Greece, America, France, and South Africa. The sad reality is that too many people – all over the world – think it’s morally acceptable to obtain unearned wealth via the coercive power of government. Though there are reasons to be optimistic because a strong majority of Chinese people have expressed support for free markets.

Second, even if China’s leaders overcome the interest groups and adopt good long-run policy, there’s still the challenge of short-term dislocation and instability caused by so-called stimulus programs and easy-money policy from the central bank. Just like you can’t un-ring a bell, you can’t magically undo the malinvestments caused by those policies. So Beijing will need to weather a temporary economic storm at the same time it engage in long-run reform.

P.S. If you want to know a recipe for Chinese stagnation, simply look at the IMF’s recommendations.

P.P.S. Some senior Chinese officials have a very astute understanding of why welfare states don’t work.

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When I compared the tax reform proposals of various 2016 presidential candidates last month, Ben Carson got the best grade by a slight margin.

But I’ve now decided to boost his overall grade from a B+ to A-, or perhaps even A, because he’s finally released details and that means his grade for “specificity” jumps from a C to A-.

Here’s some of what’s been reported in the Wall Street Journal.

Republican presidential candidate Ben Carson on Monday called for imposing a 14.9% flat tax rate on income, ending taxes on capital gains and dividends and abolishing the charitable deduction and all tax credits.

By the way, the reporter goofed. Carson is proposing to end double taxation of dividends and capital gains, but all income would be taxed. What the reporter should have explained is that capital and business income would be taxed only one time.

But I’m digressing. Let’s review some additional details.

Mr. Carson’s flat tax would apply only to income above 150% of the poverty level… In some respects, Mr. Carson’s plan is similar to those of the other candidates, all of whom want to lower tax rates… But he goes farther, particularly with his willingness to rip up parts of the tax system that have been in place for a century. …In addition to eliminating the charitable deduction and investment taxation, Mr. Carson would also repeal the estate tax, the mortgage-interest deduction, the state and local tax deduction,  depreciation rules and the alternative minimum tax.

Wow, no distorting preferences for charity or housing. And no double taxation of any form, along with expensing instead of depreciation. Very impressive.

Carson has basically put forth a pure version of the plan first proposed by economists at Stanford University’s Hoover Institution.

Perhaps most important of all, Carson’s plan is a flat tax and just a flat tax. He doesn’t create any new taxes that could backfire in the future.

Here’s what the Carson campaign wrote about his flat tax compared to the plans put forth by Rand Paul and Ted Cruz.

Unlike proposals advanced by other candidates, my tax plan does not compromise with special interests on deductions or waffle on tax shelters and loopholes. Nor does it falsely claim to be a flat tax while still deriving the bulk of its revenues through higher business flat taxes that amount to a European-style value-added tax (VAT). Adding a VAT on top of the income tax would not only impose an immense tax increase on the American people, but also become a burdensome drag on the U.S. economy.

I would have used different language, warning about the danger of a much-higher future fiscal burden because Washington would have both an income tax and a VAT, but the bottom line is that I like Carson’s plan because the worst outcome is that future politicians might eventually recreate the current income tax.

What I don’t like about the Paul and Cruz plans, by contrast, is that future politicians could much more easily turn America into France or Greece.

Here’s my video that explains why the flat tax is the best system (at least until we shrink the federal government to such a degree that we no longer need any form of broad-based taxation).

P.S. If you want to get hyper-technical, Carson’s plan may not be a pure flat tax because he would require a very small payment from everybody (akin to what Governor Bobby Jindal proposed). Though if the “de minimis” payment is a fixed amount (say $50 per adult) rather than a second rate (say 1% on the poor), then I certainly would argue it qualifies as being pure.

P.P.S. Carson still has a chance to move his overall grade to A or A+ if he makes the plan viable by proposing an equally detailed plan (presumably consisting of genuine entitlement reform and meaningful spending caps) to deal with the problem of excessive government spending.

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Since I’m a big fan of the Laffer Curve, I’m always interested in real-world examples showing good results when governments reduce marginal tax rates on productive activity.

Heck, I’m equally interested in real-world results when governments do the wrong thing and increase tax burdens on work, saving, investment, and entrepreneurship (and, sadly, these examples are more common).

My goal, to be sure, isn’t to maximize revenue for politicians. Instead, I prefer the growth-maximizing point on the Laffer Curve.

In any event, my modest hope is that politicians will learn that higher tax rates lead to less taxable income. Whether taxable income falls by a lot or a little obviously depends on the specific circumstance. But in either case, I want policy makers to understand that there are negative economic effects.

Writing for Forbes, Jeremy Scott of Tax Notes analyzes the supply-side policies of Israel’s Benjamin Netanyahu.

Netanyahu…argued that the Laffer curve worked, and that his 2003 tax cuts had transformed Israel into a market economy and an engine of growth. …He pushed through controversial reforms… The top individual tax rate was cut from 64 percent to 44 percent, while corporate taxes were slashed from 36 percent to 18 percent. …Netanyahu credits these reforms for making Israel’s high-tech boom of the last few years possible. …tax receipts did rise after Netanyahu’s tax cuts. In fact, they were sharply higher in 2007 than in 2003, before falling for several years because of the global recession. …His tax cuts did pay for themselves. And he has transformed Israel into more of a market economy…In fact, the prime minister recently announced plans for more cuts to taxes, this time to the VAT and corporate levies.

Pretty impressive.

Though I have to say that rising revenues doesn’t necessarily mean that the tax cuts were completely self-financing. To answer that question, you have to know what would have happened in the absence of the tax cut. And since that information never will be available, all we can do is speculate.

That being said, I have no doubt there was a strong Laffer Curve response in Israel. Simply stated, dropping the top tax rate on personal income by 20 percentage points creates a much more conducive environment for investment and entrepreneurship.

And cutting the corporate tax rate in half is also a sure-fire recipe for improved investment and job creation.

I’m also impressed that there’s been some progress on the spending side of the fiscal ledger.

Netanyahu explained that the public sector had become a fat man resting on a thin man’s back. If Israel were to be successful, it would have to reverse the roles. The private sector would need to become the fat man, something that would be possible only with tax cuts and a trimming of public spending. …Government spending was capped for three years.

The article doesn’t specify the years during which spending was capped, but the IMF data shows a de facto spending freeze between 2002 and 2005. And the same data, along with OECD data, shows that the burden of government spending has dropped by about 10 percentage points of GDP since that period of spending restraint early last decade.

Here’s the big picture from the Fraser Institute’s Economic Freedom of the World. As you can see from the data on Israel, the nation moved dramatically in the right direction after 1980. And there’s also been an upward bump in recent years.

Since I’m not an expert on Israeli economic policy, I don’t know the degree to which Netanyahu deserves a lot of credit or a little credit, but it’s good to see a country actually moving in the right direction.

Let’s close by touching on two other points. First, there was one passage in the Forbes column that rubbed me the wrong way. Mr. Scott claimed that Netanyahu’s tax cuts worked and Reagan’s didn’t.

Netanyahu might have succeeded where President Reagan failed.

I think this is completely wrong. While it’s possible that the tax cuts in Israel has a bigger Laffer-Curve effect than the tax cuts in the United States, the IRS data clearly shows that Reagan’s lower tax rates led to more revenue from the rich.

Second, the U.S. phased out economic aid to Israel last decade. I suspect that step helped encourage better economic policy since Israeli policy makers knew that American taxpayers no longer would subsidize statism. Maybe, just maybe, there’s a lesson there for other nations?

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During last night’s Democratic debate, Senator Bernie Sanders said he would not raise tax rates as high as they were in the 1950s. And if Twitter data is accurate, his comment about being “not that much of a socialist compared to [President] Eisenhower” was one of the evening’s most memorable moments.

But a clever line is not the same as smart policy. Promising not to raise top tax rates to 90 percent or above is hardly a sign of moderation from the Vermont politician.

Fortunately, not all Democrats are infatuated with punitive tax rates.

Or at least they didn’t used to be. When President John F. Kennedy took office, he understood that the Eisenhower tax rates (in fairness to Ike, he’s merely guilty of not trying to reduce confiscatory tax rates imposed by FDR) were harming the economy and JFK argued for across-the-board tax rate reductions.

…an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits. Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions and any new recession would break all deficit records. In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.

Here’s a video featuring some of President Kennedy’s wisdom on lower tax rates.

If that wasn’t enough, here’s another video featuring JFK’s wisdom on taxation.

By the way, if Senator Sanders really wants the rich to pay more, one of the lessons reasonable people learned from the Kennedy tax cuts is that upper-income taxpayers respond to lower tax rates by earning and reporting more income. Here’s a chart from a study I wrote almost 20 years ago.

Last but not least, let’s preemptively address a likely argument from Senator Sanders. He might be tempted to say that he doesn’t want the 90-percent tax rate of the Eisenhower years, but that he’s perfectly content with the 70-percent top tax rate that existed after the Kennedy tax cuts.

But if that’s the case, instead of teaching Sanders a lesson from JFK, then he needs to learn a lesson from Ronald Reagan.

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Is “supply-side economics” a bad thing or good thing?

It depends on what one means by the phrase. If it means that all tax cuts are self financing or that low tax burdens are the sole key to prosperity, then critics are right about it being a form of “voodoo economics.” See this Kevin Williamson column for more details.

But if the term is simply a shorthand way of saying that low marginal tax rates on productive behavior are a good thing because of better incentives for work, saving, investment, and entrepreneurship (not to mention tax compliance and good government), then supply-side economics should be non-controversial. See this piece by Alan Reynolds for more details.

As you might expect, folks on the left prefer the first definition of supply-side economics and they are instinctively hostile to big tax cuts. Especially during an election cycle.

Here’s the basic argument, from an article by John Cassidy in The New Yorker. He focuses his ire on Governor Bush, but his comments could just as easily been directed against other GOP candidates.

Here’s his basic premise.

…the Republican Party is heading on economic policy: back to the old-time religion of tax cuts. …Jeb Bush, the G.O.P. establishment’s standard-bearer, announced, as the centerpiece of his 2016 campaign, a plan to cut federal income-tax rates across the board. …wouldn’t this plan inflate the deficit, which President Obama and Congress have just spent five years trying to reduce, and also amount to another enormous handout to the one per cent? Not in the make-believe world of “voodoo economics”.

Mr. Cassidy is particularly incensed by the notion that some people believe tax cuts “pay for themselves” by generating sufficiently large amounts of additional taxable income.

The “voodoo” accusation arose from the claim that, because the policies would encourage people to work harder and businesses to invest more, a lot more taxable income would be produced, and the reductions in tax rates wouldn’t lead to a commensurate reduction in the amount of tax revenues that the government collected. Indeed, some early voodoo economists, such as Arthur Laffer, claimed that there wouldn’t be any drop in revenues. By 1988…more than half a decade of gaping budget deficits had discredited the most extreme and foolhardy version of voodoo economics.

For what it’s worth, there are several problems with the above passages.

First, while some GOPers did make exaggerated claims about the power of tax cuts, the Reagan White House never claimed the tax cuts would by self financing and instead made the very reasonable argument that lower tax rates would improve economic performance.

Second, the lower tax rates on upper-income taxpayers did lead to huge increases in taxable income and big increases in tax revenue, so there are a few examples where lower tax rates “pay for themselves.”

Third, the 1980-1982 double-dip recession was the main reason for higher deficits. Once the Reagan tax cuts were implemented, red ink began to shrink and even the Congressional Budget Office projected deficits would continue falling if Reagan’s policies were left on auto-pilot.

But let’s argue about the present rather than the past. Citing the work of some pro-Bush economists, Cassidy argues that tax cuts won’t generate as much growth as Governor Bush says he will deliver.

…the four conservative luminaries whom the Bush campaign rounded up to advise him…said that Bush’s tax plan would raise the growth rate of the economy by 0.5 per cent a year, and that the regulatory changes he is proposing would add another 0.3 per cent to the annual growth rate. But because the annual growth rate over the past five years has been 2.2 per cent, that gets us to three per cent growth, not the four per cent that Bush is promising to deliver.

Since economists are lousy forecasters, I won’t pretend to know how much additional growth the Bush economic plan would produce. But I’ll be the first to admit that Cassidy has found a gap between Bush’s rhetoric and the numbers produced by his advisers.

But does that mean big tax cuts are implausible and unrealistic?

Cassidy certainly would like readers to conclude that Bush’s plan doesn’t add up.

…the economists’ paper…makes the familiar argument that tax cuts, by stimulating growth, will lead to “revenue feedbacks.” On this basis, which is known on Capitol Hill as “dynamic scoring,” the economists reduce the estimated fiscal cost of the Bush tax cuts by two-thirds. But even a third of $3.6 trillion is a lot of red ink.

Though he (sort of) acknowledges that the Bush folks have a counter-argument.

So are the economists actually contradicting Bush and saying that his plan would expand the deficit? Not quite. …they write, “The remaining revenue loss would be offset by reasonable, incremental feedback effects from the tax and regulatory reforms, meaningful spending restraint across the federal budget…” Of course, Bush hasn’t said yet where he would cut spending

I don’t know if Governor Bush intends to produce a detailed list of ways to restrain government spending. Nor do I know whether he would follow through if he got elected (his record in Florida can be interpreted in different ways).

But I know that it’s actually very simple to have large tax cuts along with concomitant spending restraint.

And Bush’s economic advisers also understand. Take a look at these passages from their report. Citing a version of my Golden Rule, they point out that huge savings are possible simply by reducing how fast the government’s budget expands every year.

Budget discipline and economic prosperity go hand in hand. …federal spending restraint is essential to maximizing economic growth. …the Governor’s economic reforms require strong fiscal discipline on the federal budget ledger’s spending side. …the required budget goal can be achieved by reducing the growth in federal outlays from its current upward trajectory by one percentage point per year. From 2017 to 2025, federal expenditures are projected to increase at an annual rate of 4.2 percent. Limiting the increase to 3.2 percent will produce over $400 billion in budget savings in 2025 and $1.4 trillion in savings between 2017 and 2025.

Needless to say, we should have big – and immediate – reductions in government spending.

And if government is allowed to expand, it would be better if the budget grew at the rate of inflation (2 percent) rather than 3.2 percent.

That being said, it’s remarkable that even a little bit of spending restraint is capable of generating huge savings over a 10-year period. And those savings make big tax cuts very plausible. Even for the folks who myopically fixate on red ink when they should be worried about the overall burden of government spending.

So the real issue is not whether sizable tax cuts are plausible. It’s whether advocates of good tax policy are willing to impose accompanying discipline on the spending side of the fiscal ledger.

That means a President like Ronald Reagan or Bill Clinton rather than George Bush or Barack Obama.

Interestingly, Jeb Bush admits spending grew too fast while his brother was in office. Check out what he said toward the end of this interview.

For what it’s worth, I think the Bush White House was just as guilty as the GOP Congress, if not more, but that’s another fight over what happened in the past.

What really matters is that if Jeb Bush (or any other candidate for President) is serious about charting a different path and putting government on a diet, then big tax cuts are very realistic.

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In my 2012 primer on fundamental tax reform, I highlighted the three biggest warts in the current system.

1. High tax rates that penalize productive behavior such as work and entrepreneurship.

2. Pervasive double taxation that undermines saving and investment.

3. Corrupt loopholes and cronyism that lure people into using resources inefficiently.

These problems all need to be addressed, along with additional problems with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms and civil liberties.

Based on these criteria, I’ve already reviewed the tax reform plan put forth by Marco Rubio. And I’ve analyzed the proposal introduced by Rand Paul.

Now let’s apply the same treatment to the “Reform and Growth Act of 2017” that former Florida Governor Jeb Bush has unveiled in today’s Wall Street Journal.

Bush identifies three main goals, starting with lower tax rates.

First, I want to lower taxes and make the tax code simple, fair and clear. …We will cut individual rates from seven brackets to three: 28%, 25% and 10%. At 28%, the highest tax bracket would return to where it was when President Ronald Reagan signed into law his monumental and successful 1986 tax reform.

This is a positive step, effectively wiping out the tax-rate increases imposed by Presidents George H.W. Bush, Bill Clinton, and Barack Obama.

Then Governor Bush takes aim at tax loopholes.

Second, I want to eliminate the convoluted, lobbyist-created loopholes in the code. For years, wealthy individuals have deducted a much greater share of their income than everyone else. We will retain the deductibility of charitable contributions but cap the deductions used by the wealthy and Washington special interests, enabling tax-rate cuts across the board for everyone.

This also is a step in the right direction, though it’s unclear what Bush is proposing – if anything – for other big tax loopholes such as the mortgage interest deduction, the healthcare exclusion, the state and local tax deduction, and the municipal bond exemption.

The final big piece of Jeb’s plan deals with America’s punitive treatment of business income.

Third, I believe that the tax code should no longer be an impediment to the nation’s competitiveness with China, Europe and the rest of the world. …To stop American companies from moving out of the country, I will cut the corporate tax rate from 35%—the highest in the industrial world—to 20%, which is five percentage points below China’s. We will end the practice of world-wide taxation on U.S. businesses, which fosters the insidious tactic called corporate “inversions.” …We will also allow businesses to fully and immediately deduct new capital investments—a critical step to increase worker productivity and wages.

All of these reforms are very good for growth.

A lower corporate tax rate, particularly combined with territorial taxation and “expensing” of investment expenditures, will make American companies far more competitive.

More important, these reforms will fix flaws in the tax code that reduce capital formation. And that will mean more investment and higher wages for American workers.

There are other positive features mentioned in the column that are worth celebrating. Governor Bush’s plan eliminates the death tax, which is an especially punitive form of double taxation.

His proposal also gets rid of the alternative minimum tax (AMT), which is a convoluted part of the tax code seemingly designed to grab more money from taxpayers in a very complicated fashion.

Now let’s move to a part of Bush’s plan that seems bad, but arguably is good. He’s proposing to get rid of interest deductibility for companies, which will increase double taxation (remember, investors who buy corporate bonds pay tax on the interest payments they receive from firms).

…we will eliminate most corporate tax deductions—which is where favor-seeking and lobbying are most common—and remove the deduction for borrowing costs. That deduction encourages business models dependent on heavy debt.

So why is this feature arguably good when one of the key goals of tax reform is eliminating double taxation?

For two reasons. First, we already have double taxation of dividends (i.e., equity-financed investment), so imposing double taxation on borrowing (i.e., debt-financed investment) creates a level playing field and addresses the bias for debt in the tax code.

To be sure, it would be best to level the playing field by having no double taxation of any kind, but presumably the Bush team also was paying attention to revenue constraints.

And this is the second reason why this portion of the plan arguably is good. The revenue implications of this change are non-trivial, so one could argue that it is helping to finance pro-growth changes such as a lower corporate tax rate and immediate expensing of business investment.

Let’s close by highlighting some unambiguously worrisome features of the Bush plan.

According to his column, an additional 15 million Americans no longer will have any income tax liability, largely because the plan almost doubles the standard deduction. It’s good for people not to have to pay tax, of course, but we already have a system where almost half of all households are exempt from the income tax. So the concern is that we have a growing share of the population that perceives government as a no-cost dispenser of goodies.

And one of those goodies is the Earned Income Tax Credit, which is a form of income redistribution operated through the tax code. And Bush is proposing to expand the EITC, though there aren’t any details about this part of his plan.

Presumably Bush is including these provisions to somewhat fend off the class-warfare attack that his plan provides big tax cuts for the “rich” while not doing enough for the rest of the population. Yet upper-income taxpayers already pay the lion’s share of the income tax.

Even the IRS has acknowledged that the top 3 percent pay more than half the burden!

So a fair tax cut, by definition, will benefit the rich since they’re the ones who are carrying the load.

In any event, the purpose of good tax policy is to generate faster growth by improving incentives for work, saving, investment, and entrepreneurship, and that’s where you get the big benefits for lower- and middle-income taxpayers.

Simply stated, the close you get to a Hong Kong-style flat tax, the closer you get to robust Hong Kong-type growth rates.

The bottom line is that Bush’s tax plan isn’t a touchdown. Like the Rubio plan and Paul plan, it’s not a Hall-Rabushka flat tax, which is the gold standard for tax reform. But it’s a big step in that direction. Bush takes the ball from the wrong side of the field and puts it on the right side of the field.

If implemented (and accompanied by the spending restraint needed to make the plan sustainable), Bush’s proposal would be a significant boost for the American economy and American taxpayers.

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