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Wednesday, April 26, 2017

Cutting Corporate Taxes -- Energizing The Economy

President Trump is supposed to unveil the outlines of his tax plan today.  According to the advance word, one big component will be to reduce the corporate income tax to 15% from 35%.  This proposal has already drawn major comment with the attacks on it going at full speed even before it is officially proposed.

Let's take a quick look at what this proposal will do.

1.  The USA would go from the highest corporate tax rate in the world to one of the lowest.  Companies that locate their facilities in the USA will no longer have to operate at a disadvantage to foreign competitors due to taxes.  In fact, American companies would actually gain the advantage regarding taxes.

2.  This move ought to jump start the economy.  The after tax return on profitable investments in the USA would rise by almost 35% just from the change.  That would mean many more investments will make economic sense and will go ahead.  Higher investment is the single biggest way to cause economic growth and job growth too.  All that additional spending on investment and the resulting new jobs will also have a ripple effect through the economy.  Indeed, a tax cut of this magnitude ought to increase economy growth substantially.

So what are the attacks that are coming?

1.  The biggest and phoniest attack is that the tax cut will increase the deficit.  Just this morning, I heard a report that the tax cut (the exact nature of which is not yet known) will add two and a quarter trillion dollars to the national debt over ten years.  Amazing how these "experts" can determine what will happen to federal revenues without even knowing the exact nature of the tax plan, isn't it?  The key here, however, is that this analysis is static.  In other words, it does not consider the extra growth that the tax plan will bring.  But that growth is an inevitable result of the tax cut, so ignoring it makes no sense except in the world of Washington or the anti-Trump media.  Remember, if the tax plan can get the average growth rate up 2% so that instead of 1.5% the economy grows at 3.5%, the economy will be about 25% larger after ten years (due to compounding.)  That means America's GDP will be roughly five trillion dollars more after ten years than without the tax cut.  Federal taxes generally take about 20% of the GDP.  That means a trillion dollars more in tax revenues in the tenth year after the cut.  That addition would more than wipe out any drop in tax revenue from the early years of the cut.

Obviously, no one knows exactly what growth the tax cut will cause.  We do know for certain, however, that cutting taxes will accelerate growth substantially.  The idea that one would analyze the effects of the tax cuts while ignoring the impact those cuts will have on the economy is ludicrous.

2.  The second and also phony attack on corporate tax cuts is that they are designed just to help big business.  That's crazy.  If the added economic growth creates five million more well paying jobs, how could anyone say that doesn't benefit the average American?  If the economy is growing at a robust pace, that is a good thing for everyone.  Sure, it will help big business, but it will also help small business, wealthy Americans, middle income Americans and poor Americans.  It helps everyone.

We can save further review for after the actual plan is announced, but you should know in advance that the early attacks on this plan are just political propaganda put out by those who reflexively oppose anything that President Trump suggests.


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