Promoting freedom, innovation, and growth

Connect with IPI

Receive news, research, and updates

January 15, 2018

Trump's Tax Reform Is A Miracle That Should Make Everyone Giddy

  Dallas Morning News

Those of us who have spent decades advocating for tax reform are still trying to process the late December passage of the most sweeping tax reform in 30 years. There are policy experts who have literally spent their entire careers pushing for tax reform, and even organizations that exist for that sole purpose. To finally succeed seems almost too good to imagine.

My own organization, the Institute for Policy Innovation, was founded in Dallas just after Ronald Reagan's 1986 tax reform to continue to advocate for economic growth through tax policy. We began years ago to diversify into other policy areas in part because fundamental tax reform seemed impossible in a context where Democrat class warfare rhetoric demanded higher taxes and Republicans were utterly inept in actually accomplishing anything beyond rhetoric.

While the work of think tanks and a small number of elected officials who understood tax policy undoubtedly laid a strong intellectual foundation for tax reform and certainly helped guide the process, it's simply undeniable (and a little bit humbling) to admit that the catalyst for tax reform was Donald Trump.

Amazingly, what President Trump has given us is real, substantive, growth-stimulating tax reform, instead of the typical bait-and-switch we might have expected. When Democrats during the Obama administration said they were interested in tax reform, their plan was to use a slight drop in the corporate tax rate as cover for eliminating virtually all business exemptions and deductions, resulting in a higher effective tax rate. In other words, businesses would have actually paid higher taxes. And while Republicans were wise to the Democrats' gambit, they themselves would have been content with simply tinkering and then claiming credit for an impotent tax reform, as they demonstrated with their proposed Tax Reform Act of 2014.

Not Donald Trump. Perhaps Trump's greatest contribution to tax reform was selling his working-class supporters on the idea that corporate rate cuts would be good for them. Now, this is absolutely true -- lower taxes on businesses will accrue to the benefit of workers, consumers, and owners of IRA and 401k accounts. The ever-growing list of companies announcing bonuses, pay increases, higher retirement matching and price reductions is only a first installment on what is to come.

But convincing workers that corporate tax cuts would be good for them has been an almost impossible sell for tax reformers over the years -- I know; I've tried. Trump pulled it off, and that's probably the single most important factor that made tax reform possible.

Getting the corporate rate down to 21 percent was almost equally miraculous. Before Trump, not even the most blindly optimistic tax-cutter thought anything lower than about 26 percent was possible. The most powerful business coalition pushing for tax reform was pushing for a 25 percent rate, but privately would have settled for anything under 28 percent.

But by pushing for an audacious 15 percent corporate tax rate, Trump made possible a rate lower than anyone could imagine. If you had told people like me a few years ago that, in 2018, we would have a 21 percent corporate tax rate, we would have begun giggling uncontrollably. Simply too good to be true.

Why would we have been so giddy? Because there is every reason to believe that this tax reform will have significant, even transformative economic benefits for the U.S. With a 21 percent corporate tax rate, we have solved our decades-long global competitiveness problem. Beginning in 2018, the U.S. is once again the best place in the world to do business, and our competitors are already beginning to panic. Look for foreign companies to relocate their headquarters and facilities to the U.S., instead of U.S. companies moving offshore.

Trillions of dollars in corporate cash stranded overseas will soon be repatriated to the U.S. And while companies might have just parked that cash, tax reform critically includes full and immediate deductibility of business investment, so that cash will have productive places to go. This kind of private sector business investment is what drives real economic growth, and this is the first major improvement in the U.S. investment climate since 1986.

I don't know what lies ahead for the Trump administration, but President Trump has already done more to grow the U.S. economy than the last four presidents and 28 years combined. In itself that is a significant policy legacy.


 

  • TaxBytes-New

Copyright Institute for Policy Innovation 2018. All Rights Reserved Privacy Policy Contact IPI.

e-resources e-resources