GOP Tax Plan Will Boost Economy

By RYAN BOURNE

The legislative tax reform process in the United States is the political equivalent of sausage making — a process so ugly it risks turning you off the end product.

As a result, the package working its way through both houses of Congress now sits far from the lofty ideals of the fundamental overhaul Republicans promised.

Nevertheless, it is reasonable to think that, on net, it will improve U.S. growth prospects. The plan, after all, substantially lowers business taxation, cuts marginal tax rates on income and eliminates a host of implicit subsidies within the tax code.

The key reform is that the U.S.’s 35 percent corporate tax rate would be cut to 20 percent. As economist Martin Feldstein has noted, this will attract substantial capital to the U.S. corporate sector by increasing the after-tax return on investment, encouraging profit repatriation and more headquartering in the U.S.

Reasonable economic estimates suggest this alone could raise GDP by between 1 percent and 4 percent over 10 years.

Changes to the federal income tax have been less ambitious, but could boost GDP further. The Republicans want lower marginal tax rates, paid for by eliminating deductions.

The package of reforms would see a huge fall in the number of households who seek to “itemize.”

Though unlikely, there’s still even a chance the final bill might restrict the mortgage interest deduction. In order to make all this palatable, the GOP is doubling the standard deduction and expanding credits for families too.

From the left, the plan is most commonly denounced as a sop to the rich. Progressive economists highlight that the biggest cash gainers are at the top of the income distribution. But this is in part a statistical artifact, arising firstly because most on the lowest incomes do not pay federal income taxes already and, second, because procedural rules on future deficits mean that many individual tax cuts are scheduled to “expire” in future years.

My colleague Chris Edwards calculates that in 2019, when both corporate and individual tax cuts apply, all affected income groups will see tax cuts on average, with the biggest coming for those earning between $40,000 and $50,000, who see their tax bill halved on average. In comparison, those earning over $1 million would see their average tax bill fall by just 5.8 percent.

Ryan Bourne is a scholar at the Cato Institute (cato.org) in Washington. A longer version of this article appeared in the Telegraph of London.

Comment

comments

Previous ArticleNext Article