I'd Vote for It. You Should, Too
Warts and all, if I were a voting member of Congress, I would certainly cast a yea for the tax-cut plans passed by the
Senate and House that are headed for conference (to work out minor differences) in the weeks ahead.
These bills are not perfect, especially on the individual side. But the business tax cuts will generate an investment boom in the years ahead. And those cuts will bring economic growth back to its historical norm of 3 to 4 percent.
Incredibly, the Joint Committee on Taxation, or JTC, scored growth for the Senate plan at less than 1 percent. So much for its "dynamic" model. The Tax Foundation estimates 3 to 5 percent growth over the next 10 years. That's more like it, but it's still too low.
Look, the central cause of the 2-percent real-GDP growth slump over the past 17 years has been a lack of capital formation with virtually no real business investment, flattened productivity and barely any increase in real workforce wages.
Yet the tax plans under discussion — which go back to the work of economist Steve Moore, Treasury Secretary Steven Mnuchin, White House senior adviser Stephen Miller, economist Art Laffer, Forbes Media Chairman and Editor-in-Chief Steve Forbes and myself — are remarkably similar to the Trump campaign draft on the business side.
So I can say with confidence that the current tax package is directly aimed at reducing the current high tax cost of capital and increasing after-tax returns from investment.
Incentives matter. If it pays more after tax to build new capital stock and generate more business-equipment investment, people will do so. This is standard economics.
There may be disagreements on the numerical effects, but the principle has worked in the past (with Presidents Kennedy and Reagan) and will work in the future.
A 20-percent corporate tax rate, immediate full expensing, repatriation of U.S. corporate cash overseas and a 23-percent discount for subchapter S corporation pass-throughs (much credit to Sen. Ron Johnson for this) will generate way more growth and investment than mainstream forecasters suggest.
At various times, President Trump has talked about 3 percent, 4 percent and even 5 percent growth. Despite the dreary mainstream models, I believe the president will turn out to be correct.
What's more, faster economic growth will generate much higher tax revenues. From businesses to investors to entrepreneurial startups, less tax avoidance and sheltering will raise revenues far beyond the standard consensus estimate.
Supply-siders like myself always buck the trend on pricing out lower tax rates. But again, we were right in the '60s, '80s and '90s running against the tide. So I suggest history will repeat itself.
By the way, in terms of the revenue hunt going on in Congress, I wish somebody would look at the lowball estimates compiled by the JTC with respect to repatriation. It estimates $25 billion in 2018, $21 billion in 2019, and $6 billion to $7 billion in the three years following. This is nuts.
Assuming about $3 trillion coming back home at an average tax rate of 10 percent, that's $300 billion in new revenues — way beyond the JTC estimate. And that's conservative. It could be $350 billion in the first year or two, which would be substantially more revenue and a way bigger pay-for than what the JTC predicts.
And there's more on the dynamic side. Booming stock market gains of roughly $6 trillion as of late could generate another $600 or $700 billion in revenues from capital gains, as well as hundreds of billions of dollars more in dividends, which generate massive revenue increases.
None of this is scored. The government forecasters don't understand international
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