FACT & COMMENT
The GOP forgot Tax Cutting 101. Plus: Forbes’ All-Star Eateries in New York.
Two remarkable things stand out— for their absence—from the drawn-out, convoluted Republican tax-bill exercise. One is somewhat arcane but absolutely critical to effective tax policy (Ronald Reagan understood it); the other is astonishing, given all the GOP verbiage on the importance of investing and the alleged need for “revenue offsets” for most of their cuts.
marginal tax rates. This is the tax rate you pay on your next or additional dollar of income. Ronald Reagan, John Kennedy, Jack Kemp and other wise tax cutters of the past grasped the significant fact that the marginal tax rate is what matters most to individuals and businesses in their decision making on whether to work to earn more or where to invest. Take an extreme example that makes the point: Say someone makes $50,000 and is taxed at 10%; if she works harder she can boost that income to $60,000. However, if the additional $10,000 will be taxed at 98% instead of 10%, the individual will either forgo the extra income or consult a tax lawyer or accountant to find some way to shelter it. The same is true of a business. Investing is risky enough, but if any extra profit is going to be taxed at an exorbitant level, the company will probably not make the investment to expand the enterprise and will instead put the money into tax-free municipals.
Tax rebates have little impact on expanding an economy, because they don’t change marginal tax rates. They are one-shot deals. Nice to have, but they won’t really affect what financial decisions are made, the way a lower marginal tax rate would.
The same is true of the current Republican obsession with sharply expanding the child tax credit to show how much the party loves middle-class and lower-income families. The parent or parents will have less of a tax bill, but their marginal tax rate won’t change. (The credit is partially “refundable,” which means the family may get money even if it pays no income tax.)
To gin up a sluggish American economy, both John Kennedy and Ronald Reagan slashed personal income tax rates from top to bottom. The cuts weren’t tied to reductions in spending or to the elimination or clawbacks of personal tax deductions. (For his second big tax bill, which took place five years after the first one, Reagan did do away with numerous tax shelters, but personal tax rates were knocked down.)
Contrast their approach to what Republicans did this time to individuals: They got rid of or sharply curtailed numerous deductions but didn’t slash the tax rates. In fact, for some upper-income earners—the people who disproportionately supply the savings necessary for investments that improve the standard of living—the marginal rate will go up. Unlike the JFK and Reagan efforts, the GOP’s work on the personal side was pitiful, doing next to nothing to boost the economy. Never in the annals of tax-cutting history has so much effort been expended to achieve so little. Republicans would have been better off enacting a 10% reduction in rates for everyone. To make sure all workers got higher paychecks, they could have repeated what was done in 2011–12 and knocked off the first two points of the federal payroll tax.
Capital gains. This is a real stunner for a party that’s supposed to be the champion of promoting economic growth: Not once during the months of putting together a tax-cut bill was the idea of reducing the levy on capital gains ever seriously entertained. Cutting this rate is a powerful twofer: Revenues always go up immediately, and productive investment is boosted. The instant extra money could have “financed” extra tax cuts. What’s not to like? Apparently, like cowardly lions, Republicans feared this economy-boosting measure would open them up to the charge that they favor the “rich.” Well, they should have learned long ago that Democrats will hurl this false accusation no matter what.
Nonetheless, the GOP is lucky. The economy is gaining speed just from the fact that, unlike during the Obama years, Washington isn’t daily dreaming up new ways to hobble business. President Trump’s deregulation push is bearing fruit. And the good of whacking the corporate tax rate and meaningfully cutting the tax on partnerships and other so-called pass-throughs (whereby profits are passed directly to individual owners as personal income) will overcome the other, oft egregious shortcomings of what the Republicans have wrought.