Now’s the time to adjust taxes

Lowering the corporate rate and killing the death tax will aid the marketplace

To cut or not to cut taxes, that is an economic question. The question arises at all because, while campaigning during the summer of 2016, Donald Trump committed, if elected, to both cut taxes and reform the federal tax system.

To boost economic growth the reform must simultaneously lead to lower taxes and to a simplified tax system. In January when Trump was inaugurated, the unemployment rate was 4.8 percent. By October it dropped to 4.1 percent. America has not benefitted from such a low unemployment rate for longer than a decade. Cutting taxes now would leave more money in households’ pockets, thus, leading to both higher consumption and investment levels, respectively. Given the low unemployment rate, basically a state of full employment, in the wake of a tax cut we should expect rising prices rather than growing real GDP.

For now Congress should focus on tax reforms as follows:

1. Eliminate the “death” tax. This inheritance tax is levied on the value of an estate when its owner passes away. The death tax is bad because the inheritors, to avoid paying the expensive tax, are likely to divide the asset among themselves while the owner is still alive, an arrangement that is likely to result in managerial inefficiencies and, consequently, in economic losses. The best way to reform the death tax is to abolish it altogether.

2. The corporate income tax is imposed directly on the profit of the corporation. This means that, realistically, assuming profit maximization, varying the rate of the corporate tax would not affect a typical corporation’s production rate. However, an entrepreneur that is interested in investing in a new firm will compare corporate income taxes at home and abroad. The U.S. statutory federal corporate income tax rate at 35 percent is the highest among the industrial countries. In Canada, U.K. and Germany the rates are 15, 19.6 and 15.8 percent, respectively. In Ireland the corporate income tax is 12.5 percent. Lowering our statutory corporate tax from 35 percent to, say, 15 percent would repatriate most of our corporations abroad, thus enhance private investment in domestic enterprises and provide a huge boost to production and employment at home.

3. To illustrate the personal federal income tax consider the schedule for a single taxpayer in 2017. An individual’s taxable income — income net of all the deductions, standard or itemized — is distributed into seven brackets. A 10 percent tax is imposed on the lowest bracket ($1-$9,325) and 39.6 percent on the highest, seventh bracket (over $418,400). Intermediate size tax rates are imposed on the five remaining brackets. Economic theory is straightforward in this case: Cutting the top personal income tax rate, say, from 39.6 percent to 30 percent will go a long way to accelerate economic growth.