Warts and all, if I were a voting member of Congress, I would certainly cast a “yea” vote for the tax-cut plan passed by the Senate and House and headed for conference (to work out minor differences) in the weeks ahead.
These bills are not perfect, especially on the individual side. But the business tax cuts will generate an investment boom in the years ahead. And those cuts will bring economic growth back to its historical norm of 3 to 4 percent.
Incredibly, the Joint Tax Committee (JTC) scored growth for the Senate plan at less than 1 percent. So much for their “dynamic” model. The Tax Foundation estimates 3 to 5 percent growth over the next ten years. That’s more like it, but it’s still too low.
Look, the central cause of the 2 percent real-GDP growth slump over the past 17 years has been a lack of capital formation, with virtually no real business investment, flattened productivity, and barely any increase in real workforce wages.
Yet the tax plans under discussion — which go back to the work of Steve Moore, Steven Mnuchin, Stephen Miller, Art Laffer, Steve Forbes, and myself — are remarkably similar to the Trump campaign draft on the business side.
So I can say with confidence that the current tax package is directly aimed at reducing the current high tax cost of capital and increasing after-tax returns from investment.
Incentives matter. If it pays more after tax to build new capital stock and generate more business-equipment investment, people will do so. This is standard economics.
There may be disagreements on the numerical effects, but the principle has worked in the past (JFK and Reagan) and will work in the future.
A 20 percent corporate tax rate, immediate full expensing, repatriation of U.S. corporate cash overseas, and a 23 percent discount for sub-chapter S pass-throughs (much credit to Senator Ron Johnson for this) will generate way more growth and investment than mainstream forecasters suggest.
At various times, President Trump has talked about 3 percent, 4 percent, and even 5 percent growth. Despite the dreary mainstream models, I believe the president will turn out to be correct.
What’s more, faster economic growth will generate much higher tax revenues. From businesses to investors to entrepreneurial startups, less tax avoidance and sheltering will raise revenues far beyond the standard consensus estimate.
Supply-siders like myself always buck the trend on pricing out lower tax rates. But again, we were right in the ’60s, ’80s, and ’90s, running against the tide. So I suggest history will repeat itself.
By the way, in terms of the revenue hunt going on in Congress, I wish somebody would look at the lowball estimates compiled by the JTC with respect to repatriation. The JTC estimates $25 billion in 2018, $21 billion in 2019, and $6 billion to $7 billion in the three years following. This is nuts.
Assuming about $3 trillion coming back home at an average tax rate of 10 percent, that’s $300 billion in new revenues — way beyond the JTC estimate. And that’s conservative. It could be $350 billion in the first year or two — substantially more revenue and a way bigger pay-for than the JTC predicts.
And there’s more on the dynamic side. Booming stock market gains of roughly $6 trillion of late could generate another $600 billion or $700 billion in revenues from capital gains, and hundreds of billions of dollars more in dividends, which generate massive revenue increases.
None of this is scored. The government forecasters don’t understand international flows and the interactions of stocks, capital gains, and dividends. Their estimates are probably several trillion revenue dollars short.
Sure, there are things on the individual side that should be changed. Personal tax rates should be much lower. A backdoor capital-gains tax hike on individual investors must be erased. And the proliferation of tax credits is inefficient and complex, with no marginal incentives to promote growth.
Yes, everybody likes kids. But not everyone has them. And a lot of people like dogs and cats. Shouldn’t they get tax credits, too? No. If you’re looking for more money in your pocket — more take-home pay — the best prescription is to slash personal tax rates for everyone.
(By the way, why didn’t Congress end the carried-interest loophole for private-equity firms?)
But here’s the crux of the matter: An investment boom generating much faster growth will benefit everyone. Small businesses, new businesses, investors, and wage earners will all prosper from a tax-cut-led investment boom.
Yes, a rising tide will lift all boats. The great news is that President Trump, the Senate, and the House are absolutely moving in the right direction, and gathering momentum on the way.
I’d vote for it. You should, too.
– Larry Kudlow is CNBC’s senior contributor. His new book is JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.