Much as President Trump used his speech at the United Nations to take back control of our foreign policy, he has seized and energized the tax-cut issue. Almost daily, he is pounding away on the themes of faster economic growth and more take-home pay, arguing that his plan will make Americaís economy great again.
This is Trumpian leadership at its best.
ďUnder my administration,Ē Mr. Trump just told the National Association of Manufacturers, ďthe era of economic surrender is over.Ē
The Trump plan would slash large and small business tax rates, double the standard deduction for middle-income folks, make the whole tax code simpler by eliminating unnecessary deductions, repeal the death tax, and end the alternative minimum tax.
As usual, Democrats say the presidentís plan is a hand-out to the rich. But in a recent speech in Indianapolis, Mr. Trump asked: Why canít this be a bipartisan tax cut bill? He even quoted Democrat John F. Kennedy, who said, ďThe right kind of tax cut at the right time . . . is the most effective measure that this government could take to spur our economy forward.Ē
Mr. Trump also reminded his audience that President Reaganís tax cuts were passed with significant bipartisan majorities. But todayís Democrats have written JFKís tax story out of the history books (never mind Reaganís).
Key tax-writing committees are now polishing the Trump plan, fine-tuning it to pass the Senate with 51 votes. There are a couple of key points that need clarifying.
The argument that the United States is doomed to growth of 2% or less ó ďsecular stagnationĒ ó no matter what we do in terms of tax policy, is nonsense. Across-the-board tax cuts produced 5% annual growth during the JFK period. After tax cuts were fully implemented in 1983, real growth averaged 4.6% for the remainder of Reaganís presidency.
Treasury Secretary Steven Mnuchin and Director Gary Cohn of the National Economic Council are touting the 3% growth scenario, saying it will pay for the tax cuts. The naysayers refuse to admit that tax-rate incentives matter.
Okay, letís take one example from the Trump tax plan. Corporations today are taxed at 35%. That means, for every extra dollar of profit, a company keeps 65%. But the president has agreed on a 20% corporate tax rate. So, for the extra dollar earned, the private company would keep 80%.
Thatís a massive 23% incentive reward. Do we really think businesses will not be affected by this? That defies logic.
Supply-side mentor Art Laffer points out that the incentive reward of a lower business tax rate will reduce tax avoidance and sheltering. Itís another solid point mainstream economists ignore.
The incentive effects donít stop there. The key to wage growth is productivity. Think of it as efficiency. Large and small businesses need new capital investment to modernize equipment and better train an efficient workforce.
Yet real wages have barely increased since 2000, alongside virtually no productivity increases and a huge slump in capital formation. Thatís the missing link between a 2% and a 3% economy.
Rather than punish investment, the Trump plan will spur growth across the board. Everyone will benefit.
The supply-side incentive effect also includes the repatriation of trillions of dollars that American companies have lodged overseas to avoid taxes, as well as 100% expensing write-offs for new investment of any kind.
Taken together, this plan contains a mountain of incentives.
On the individual side, the sleeper tax detail is the doubling of the standard deduction. As my CNBC colleague Jake Novak points out, this is a huge positive for young millennials (who donít own much) and folks with no mortgages or homes. It puts more cash in workerís pockets, simplifies the code, and means that nearly 80% of taxpayers wonít have any deductions.
Slimming income-tax rates from seven to three brackets and cutting income-tax rates in general add even more supply-side incentives to the Trump package.
More money for rich people? Well, the not-rich family of four will be a lot better off with a $24,000 standard deduction. The center-right Tax Foundation calculates that the bottom 80% of households get a lower tax burden, while the top 20% get a higher burden.
The Republican party has got to win this issue, preferably this year.
So, a warning: The GOP cannot let archaic process rules prevent good policy. Rules can be changed. CBO estimates can be ignored. Parliamentarian decisions can be overridden.
Play hardball, GOP. JFK did it. Reagan did it. Now you have Donald Trump doing it ó using all his energy to get a big tax cut that will return prosperity to Americaís workers and families and enhance our strength overseas.