“God put the Republican Party on earth to cut taxes. If they don’t do that, they have no useful function.” – Robert Novak
Mick Mulvaney, Director of the Office of Management and Budget, announced the future economic plan for the Trump administration. Coined “MAGAnomics,” the traditional naming-system for economic plans using the President’s name (i.e. Obamanomics, Reaganomics) was thrown out. Instead of “Trump,” the prefix of the term was affixed with “MAGA” for “Make America Great Again.” The administration focused the plan on increasing the wealth of the middle class, job creation, and business growth.
MAGAnomics is multifaceted to include matters of trade, regulation, policy, and taxes. I am going to be focusing on tax policy. Cutting taxes is the hallmark of the Republican Party. Few can argue that there has been a long standing platform within the party. The classic debate usually consists of Republicans arguing in favor of tax cuts in order to stimulate growth in the economy, while Democrats arguing in favor of higher taxes to fund welfare/ entitlement programs to stimulate growth. This side of the tax reform debate is the most widely publicized and perhaps the least important. Unlike health care or immigration, Republicans stand united behind tax cuts. Therefore, like almost every Republican majority before them, taxes will be cut. With a federal tax code that is 74,608 pages long, the question is not “Will taxes be cut?” Instead, the question is, “How will taxes be cut?” Past Republican administrations back to Harding have been pursuing the same basic principle but with different variations. To attempt to forecast the effects of Republican tax reform, we must dissect each of one MAGAnomics’ tax plans and compare them to those of past administrations.
MAGAnomics has three basic tax principles: lowering and consolidating personal income tax brackets, lowering business taxes, and most importantly, achieving revenue neutrality.
Personal Income Taxes
The Trump Administration wants to consolidate the tax brackets from 7 income groups to only 4 with decreased bracket values of 0%, 10%, 20%, and 25%. They would also hope to raise the level required to be in the 0% bracket to contain individuals making less than $25,000 a year and married couples making $50,000 a year (more people would be paying 0% in taxes). The most similar tax reform to this plan is Reaganomics’ Tax Reform Act of 1986. Reagan pushed for a consolidation and lowering of tax brackets to 11%, 15%, 28%, 35%, 38.5%. He also rose the bottom tax bracket to cover married couples making $5,720 a year to $29,750 a year. While President Reagan had many economic policies with varying effects, the one effect most directly linked to the Tax Reform Act was the rise in real per-capita income. This increased by 18% leading to an overall standard of living increase by 20%. If Trump can achieve lower personal income taxes paired with a simplification of the tax code, he could expect similar results to Reagan’s administration.
Business Taxes
The United States currently has the third highest, nominal corporate tax rate in the world. Provided, certain corporations, especially financial institutions, have over the years accumulated a vast number of loopholes through lobbying in order to avoid paying the high nominal tax rate. MAGAnomics wants to reduce the highest corporate tax rate to 15%. The country has witnessed the lowering of corporate tax rates during many administrations including Kennedy and Reagan’s. Following their corporate tax cuts, the nation experienced increases of economic growth, job growth, and capital investment. However, a slashing of the top corporate tax rate to 15% would be the largest in our history (this fact is often proudly touted by President Trump). Corporate tax rates would decrease to levels not seen since the 1920s. Republican economic policies under Harding & Coolidge were characterized by low taxes, spending cuts, and protective tariffs. During their presidencies, the country’s economy was considered to be “roaring.” However, many considered their blatant favoritism toward business to be some of the root causes of the Great Depression and Stock Market Crash of 1929. Trump might be careful implementing such low taxes and deregulatory policies on businesses, especially financial institutions. Greater disposable income coupled with less oversight could lead to rampant speculation and perhaps an inflammatory economy.
‘Revenue Neutrality’
‘Revenue Neutrality’ is the idea that if you have tax reform and cut taxes in one area, the lost tax revenue has to be made up in another. This argument is common amongst fiscally staunch conservative members of Congress and liberals who oppose tax cuts, especially for corporations. When looking simply at the idea of cutting taxes and making citizens pay less to the federal government, it is expected that the federal government would receive less money. However, following the tax cuts of the 1920s, Kennedy, and Reagan administrations, tax revenues to the federal government actually increased. Not only that, but richer people were paying a higher burden of the taxes despite their own nominal rate being slashed. How could this possibly be? It certainly wasn’t patriotism; no one is patriotic when it comes to paying taxes. One would first point to economic growth as the leading culprit (bigger economy, more economy to tax). However, the 4-5% economic growth rates of the aforementioned administrations could not account for the more than 60% increase in tax revenue over a period of only eight years. The most explanatory factor for this phenomenon is the simplification and consolidation of the tax code. Without special lobbied loopholes and exemptions, it is harder for companies to avoid paying taxes. A lower nominal tax also encourages companies not to reshore their operations and even encourages foreign companies to move their operations to the United States. Long-run revenue neutrality does not have to be accomplished by offsetting lower taxes in one area with higher taxes in another.
Tax reform appears to be next on the docket. The Republican Party has seemed unable to rally support behind an effective healthcare plan. The same attitude should not be taken behind tax
reform. To achieve successful tax reform, the Trump administration should look toward the past and analyze the successes and failures of past Republican tax reform. Slashing taxes can be very successful if it is controlled and consolidated and accompanied with a simplification of the tax code. Complicated loopholes, exemptions, and classification of income should be avoided in order to achieve economic growth, job growth, and increased tax revenue.
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