The turn taken in the Senate Finance Committee away from the House tax bill (HR-3838) improves the prospects for real reform. This turn of events makes it more imperative than ever for supply-siders to dissociate themselves from the bad tax policy of the House bill. That bill is proof that reductions in tax rates do not guarantee better economic performance regardless of other changes in the tax code. Some people talk as if repealing investment deductions (such as the investment tax credit) would automatically help the economy. Such a position is nonsensical. Repealing such deductions can help the economy only if tax rates are cut enough to offset their loss. To know how much tax rates have to be cut, you have to be able to measure the economic effects of tax rates and the lost deductions. If these measurements are not made, it is possible to lose more than is gained.
The House bill, by cutting the top marginal tax rate from 50 per cent to 38 per cent, seems on the surface to be a supply-side victory. However, other provisions in the bill more than offset the favorable economic effects of lower tax rates. On balance, the House bill would damage the economy. It would particularly weaken new investment in machinery and equipment and harm exports and noncorporate businesses. In my view, the essential goals now for those interested in real tax reform are to make the defects of the House proposal crystal clear, to keep similar problems out of the Senate bill, and to make sure that the House/Senate-conference version lowers marginal tax rates enough to offset the loss of savings incentives and investment-related deductions.
Comments