Politics & Policy

The Senate GOP’s Corporate-Tax-Cut Delay: A Recipe for Recession

Senate Majority Leader Mitch McConnell (Joshua Roberts)
Don’t give investors an incentive to wait until rates drop. That would stall the economy.

Senate Republicans have a secret political death wish. They want to lose their majority and return to the far lighter burden and far broader vacation options available to that body’s minority party. Let Chuck Schumer and the Democrats do the heavy lifting.

That’s the only explanation for the Senate GOP’s foolish, economically illiterate, and historically amnesiac proposal to delay corporate-tax reduction. The Senate’s draft tax bill would cut the corporate tax rate from 35 percent to 20. The good news stops there. To the astonishment of supply-siders across America, Senate Republicans propose to suspend this cut for one year — presumably until January 1, 2019.

This is a recipe for recession.

Imagine that you can open a store, hotel, or factory on January 1, 2018, and face a corporate rate of 35 percent. Alternatively, you can wait one year, and then pay 20 percent tax on those revenues. Why not simply leave that money in the bank for twelve months, earn modest interest on your capital, and spend that time on other activities? This makes total economic sense.

Alas, if the 20 percent rate gets waylaid until 2019, then throughout next year workers would not be hired, contractors would not be engaged, office supplies would not be purchased, raw materials would not be delivered, manufacturing equipment would not be ordered, TV and digital ads would not be scheduled, and joint ventures would not commence. In other words, Senate Republicans have unveiled a plan for economic stasis, and during an election year no less.

This is staggeringly inept.

Ronald Reagan could be forgiven for making this mistake, since tax reduction was a fairly novel concept in 1981. That August 13, he signed the Economic Recovery Tax Act at his beloved and beautiful Rancho del Cielo above Santa Barbara, Calif. That legislation slashed income taxes by 5 percent immediately, 10 percent on January 1, 1982, and another 10 percent on January 1, 1983. Also, the top rate plunged from 70 percent to 50. Business owners who filed as individuals faced a decision: Expand operations at the start of 1982 and enjoy a 15-percentage-point tax break, or put things off for a year and see a 25-percentage-point cut.

Senate Republicans have unveiled a plan for economic stasis, and during an election year no less.

Guess what? Many entrepreneurs chose the latter.

The result? The severe recession of 1982. Thanks also to the Federal Reserve’s anti-inflationary tight-money policy, the economy tanked. Gross domestic product contracted that year by 1.9 percent. No surprise, voters blamed Republicans. The GOP took a beating in that November’s midterm elections.

Senate Republicans saw no net pickup in seats, compared with the twelve that they gained in 1980, along with control of the upper chamber, on the night that Ronald Reagan crushed President Jimmy Carter in a 44-state landslide. House Republicans gained 34 seats in 1980, but they lost 26 two years later. Things looked bleak for the elephant party and Reaganism.

Barely two months after that, however, New Year’s Day 1983 arrived, along with the full dosage of the Reagan tax cuts. The economy climbed like a Saturn V rocket. It soared 4.6 percent that year and 7.3 percent in 1984. That November, the boom propelled Reagan to a 49-state, 525-electoral-vote demolition of former Democratic vice president Walter Mondale. He won only his home state of Minnesota’s ten electoral votes and the three from Washington, D.C. House Republicans remained in the minority but gained 16 seats. Senate Republicans kept control, although they yielded two seats to Democrats that night.

Under Reagan’s supply-side leadership, the economy and employment continued to expand. Alas, his successor, the disastrous George H. W. Bush, showcased how he and his aides were so much more sophisticated than the supposedly dimwitted Reagan and his circle, whom the Bushies largely scorned. Bush exhibited his vaunted brilliance by jettisoning his “Read my lips, no new taxes” pledge. He announced new, higher taxes in July 1990. The economy soon slowed. It then entered full-on recession in 1991, as GDP shrank 0.1 percent. The next year, Bush lost the White House and ushered in the Clintons and their still-active kleptocracy.

How brilliant.

Senate Republicans inexplicably want to reprise the tragedy of 1982. They are ignoring the numerous free-marketeers who have warned against repeating this dangerous error.

Supply-side Founding Father Arthur B. Laffer urges Republicans to “do the corporate tax rate without a phase-in. The phase-in is a killer,” he told Fox News Channel’s Bill Hemmer this morning. “If you know they’re going to cut tax rates next year, you’re going to defer all your income and production until next year, and it’s going to cause a deep recession. If they put in the phase-in, that would kill the economy for at least a year, and I hope they don’t.”

“The Senate Finance Committee’s principles for tax reform are a welcome part of the discussion,” stated Jason Pye, vice president for legislative affairs at FreedomWorks. “There is a lot to like, but the committee’s plan to delay the reduction in the corporate tax rate until the beginning of 2019 is unacceptable. If we don’t make the corporate-tax-rate reduction immediate, Americans won’t see the impact of economic growth and job creation by November 2018.”

“This is lunacy,” the New York Post editorialized last Friday. “History has shown that such delays don’t just put off economic growth — they actually reduce it in the years before the cut kicks in.”

Let’s make the highly unlikely assumption that American companies will violate their own economic interests and maximize their profits in 2018 rather than wait just one year to see them taxed at a nearly 43 percent lower rate. (A 20 percent corporate tax is 42.85 percent smaller than today’s 35 percent corporate rate.) Why keep these firms uncompetitive for even another day, much less one more year? This is like telling a group of short twelve-year-olds they should drink more milk — but not until they turn 14.

Unless GOP senators really crave their vacations so much that they want to let Chuck Schumer boss them around, they need to reject this latest example of Mitch McConnell’s failed leadership.

U.S. firms struggle today beneath the highest statutory corporate tax rate in the industrialized world. The only nations that punish their companies with higher taxes are Suriname (36 percent), Comoros (50 percent), and the United Arab Emirates (55 percent). Among the 202 jurisdictions that the Tax Foundation analyzed, the average corporate tax is 23 percent. Ireland continues to thrive, thanks to a 12.5 percent corporate rate that draws investors like I-beams to an electromagnet.

U.S. CEOs, entrepreneurs, and workers have labored with this massive, 35 percent millstone around their necks for decades. Given the option of immediately shrinking this debilitating weight to a level below that of America’s economic rivals, Senate Republicans want Americans to remain stooped in pain for one more year. This is a uniquely cruel policy of economic self-sabotage.

The Senate tax measure is also a total belly-flop on simplification. The joint framework on which President Trump and congressional Republicans agreed would reduce America’s current personal-income tax rates from seven to three. House Republicans have created a noxious and convoluted fourth tax rate of 45.6 percent on incomes between $1.2 and $1.6 million. But at least they lowered the number of brackets. With any luck, the House will scrap this new top rate and deliver a three-bracket system, with rates no higher than today’s top levy of 39.6 percent. The framework’s 35 percent top rate would be far better.

The Senate couldn’t be bothered with such simplification. GOP tax writers went from today’s seven rates to their proposed . . . seven rates.

Pathetic.

The Senate’s draft tax bill is a suicide pact that would steer the economy into a ditch in the same year that Americans go to the polls for the midterm congressional elections.

Unless GOP senators really crave their vacations so much that they want to let Chuck Schumer boss them around, they need to reject this latest example of Mitch McConnell’s failed leadership and, instead, schedule the 20 percent corporate tax rate to kick in the moment that President Trump signs it into law. With that time bomb defused, they can move on to the other urgent matter: scrapping the death tax, rather than nibbling at it, and moving to three lower tax rates rather than today’s seven.

Tax reform comes along about once per generation. As currently constituted, the Senate tax bill has miles to go before it deserves that distinction.

READ MORE:

The House GOP’s Tax Plan Embraces Class Warfare

EDITORIAL | The GOP Tax Plan is a Good Start

The Tax Fiasco

Deroy Murdock — Deroy Murdock is a Manhattan-based Fox News contributor and a contributing editor of National Review Online.

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