Our country has a debt problem. Will tax cuts help solve it? We have a budget crisis in Washington in which our political leaders cannot fulfill their budget responsibilities on behalf of the country. The Banking Crisis of 2008 … the political decisions of the Obama era … the daily drama that is the Trump Administration … these issues and more have prevented the public from focusing on a ticking time bomb that could affect our way of life just as much as conflict with North Korea, and dwarf the financial Armageddon we faced with the market collapse in 2008.
Economic growth, which we will refer to as GDP growth, has been the hallmark of the past American century. Growth in the private sector increases net revenue in the tax receipts to the government that we collect, and helps the government pay its bills. It goes without saying that the historically awful 1.9% growth of the Obama era was simply not enough to meet the demands of an ever-growing Federal government. Furthermore, Congress lacked the discipline (historically nothing new) and in many areas the Obama Administration simply violated the law and the Constitution to keep spending money illegally (shutdown threats, Obamacare subsidies).
Trump has made several promises both on the campaign trail and as president that suggests a return to the normal budget process, and tax and spending policies which could help foster significant economic growth and provide a “fairer” tax system. But so far, Congress has been slow-walking the process. Some believe that many Republicans wish to sabotage the Trump presidency by not doing anything. Even worse, if true, some Republicans may simply be big-government liberals who prefer the current budgeting failures.
Needless to say, this is a challenging environment to pass, and benefit from, pro-growth Tax Policy. But if we could pull it off, we could be looking at GDP numbers which could turn the tide on our debt crisis, reverse the Obama-era stagnation, and help fund the government for years to come.
I. What is the History of Pro-Growth Tax Policy?
- Pro-growth tax policy doubles the economy every 18-20 years. Three and a half to four percent economic growth doubles the economy roughly every 20 years. That’s extraordinary. While the top tax rates were between 70-90% from 1945-1973, those rates only hit a few hundred people nationwide. With lower rates at the middle-income level, and a post-war dollar policy tied to gold, America sustained a growth rate of 3.3% during this time. The same 3.3 growth rate occurred during the low tax era beginning with Reagan. From 1982-2007 the US again averaged 3.3% growth.
- High tax rates and multiple brackets lead to stagnation. Keynesian policies of high government spending, high levels of government debt, and substantial increases in government regulation, stagnated the economy in the 1970’s and recently again during the Obama era, with devastating effects for employment and retirement savings.
- GDP goes up when tax rates are lowered, and tax brackets are flattened. Not only is tax reduction a boon for economic growth, the resulting free market expansion has always led to increased revenue for the government to pay its bills. Tax receipts go up because there are more transactions to tax, more people paying more payroll taxes. As an example – tax receipts during the Reagan era (1981-89) by 60%…….the Nixon/Ford/Carter era they grew only 40% (1972-80). Yes – you can increase government revenue by simply taxing and taking more from the people. But you only get GDP growth, increases in tax revenue, AND a healthy free society from reducing taxes and flattening the tax code.
According to Peter Ferrara of the Heartland Institute, there are several policy decisions the Obama Administration pursued to get the WRONG outcomes for tax collections and economic growth. They included:
II. What NOT to do for Robust GDP Growth:
- Raise the top tax rate of every U.S. tax, with the exception of the top corporate rate, since it was already one of the highest in the world.
- Impose massive new regulations on health care, finance, and energy production.
- Raise all federal spending with the exception of defense, and create a debt without tracking the costs and benefits of the expense.
- Support unprecedented Federal Reserve monetary policy even after the crisis which led to the policy has abated.”
- Weak dollar policy through massive money printing and bank bailouts.
This was the previous Administration’s agenda. This was a textbook case on how NOT to grow an economy.
So, the opposite is true, right? Well… yes. The Reagan prescription for solid economic growth is the same today as it always been, because it is a free market, capitalist solution to our economic growth and debt woes.
III. What we SHOULD do for robust GDP growth:
1) Cut taxes and GDP will grow. Reagan cut tax rates and restored incentives for production and capital investment. He did this with a 25 percent tax cut for every taxpayer, and his 1986 tax reform together reduced the top income tax rate from 70 percent to 28 percent.
2) Deregulate the marketplace across multiple industries. Deregulation reduces the challenges for business start-ups as well as existing businesses to produce, expand and grow.
3) Cut government spending. Reagan cut government spending which is contrary to Keynesian economics, as government spending, deficits and debt subtract from rather than add to the economy. While deficits went up during Reagan, this had more to do with a Democratic congress not cutting as much from the budget fat as Reagan requested.
4) Strong dollar policy, tight fiscal and monetary policies. Strong dollar monetary policy helped eradicate double digit inflation and rampant unemployment within three years of taking office. This also led to an unprecedented expansion of global investment in the U.S. economy, and led an 18-year expansion of American GDP growth.
Economic growth requires flat, fair and lower tax rates. It is the hallmark of the free market system – you keep what you produce.
Economic growth does not just benefit the individual, but it also is necessary to help improve the bottom line for government revenue, and to help us meet our unprecedented financial obligations.
The Republicans have released their Trump influenced tax plan. They haven’t passed anything yet since the election. Let’s hope they get tax reform passed… and soon.