We have arrived at the tipping point.
The Republican Congress and the White House have announced the framework for reducing and simplifying the federal tax code.
The battle to enact tax reform over the next three months will decide two questions.
One, can America return to her historic annual growth rate of 3 percent plus and leave behind the anemic 2 percent growth rate of the Obama “recovery”? Or not?
The Washington-based pundits have begun proclaiming that 2 percent growth is the “new normal.” China can grow at 7 or 8 percent, but Americans, we are told, must get used to 2 percent growth, the European growth rate befitting a sclerotic welfare state past its prime.
These predictions/assertions would be more depressing if one failed to remember that this is exactly what the very same “experts” announced in the late 1970s when Jimmy Carter’s policies also led to “malaise” and negative growth rates. There were “limits to growth” said all the beautiful people on network television. We should stop trying to grow faster. Limit our hopes for the future and for our children.
And then Reagan cut taxes and growth rates shot up to 4 percent a year and we created 4 million new jobs in 1983 — the first year of the Reagan tax cuts.
The second question we are about to answer is: “Can the thin Republican majorities in the House and Senate combine with the White House to govern against a Democrat Party determined to filibuster and delay any and all Republican successes so they can denounce the Republicans as incapable of governing?”
The good news for the country is that the answer to both questions is a resounding “yes.”
The tax plan will pass by mid-December and it is powerful enough to kick-start the present economy that has been damaged and weakened by eight years of tax hikes, “stimulus” spending, the doubling of the national debt, swelling unfunded liabilities and new and expensive regulations.
The tax reform plan outlined by the Big Six — House and Senate leaders and Treasury Secretary Steven Mnuchin and White House economic advisor Gary Cohn — has three major drivers of economic growth.
First, it reduces the business tax, the corporate income tax rate of 35 percent down to 20 percent. Our present corporate income tax rate of 35 percent is higher than any other major nation. China has a 25 percent tax rate. How did we expect to create jobs and opportunities here at home weighed down by taxes higher than a communist country? Russia’s top corporate rate is 20 percent. Canada’s is 15 percent (federal rate). The European average is just above 20 percent. This rate cut makes America competitive in the world once again.
President Trump does remind us that he wanted — and still wants — a top rate of 15 percent. While I hope he is successful in driving the rate down to 15 percent during his presidency, 20 percent is a very, very good start.
Tax rates on business income paid by the 30 million smaller “pass through” businesses that pay taxes through the personal income tax code — sole proprietorships, partnerships, Subchapter S corporations — will see their top rate fall from 40 percent to 25 percent.
Half of business income is earned by larger corporations, and half is earned by “pass through” businesses. Half of Americans work for a major corporation and half for smaller “pass-throughs.”
Finally these smaller firms will see their taxes reduced.
The second big bang for job creation will be moving from long depreciation schedules for new business investment in plant and equipment to full and immediate business expensing. Buy a million dollars of new equipment to make your employees more productive and you expense that million — it does not count as taxable income because you just spent it. This greatly reduces the cost of new investment.
The Republican plan introduces full expensing for five years. Then it goes away like Cinderella’s stagecoach. But I will bet you dollars to donuts that the powerful pro-investment, pro-growth effects of full and immediate expensing will convince Congress to extend the expensing provision just as Congress repeatedly extended the Research and Development Tax Credit. Eventually expensing, like the R&D tax credit, will be made permanent.
Third, tax reform will allow businesses that have earned and parked more than $2.5 trillion overseas to bring those dollars back without the stiff tax penalty demanded by present law. In the future all American earnings abroad would be taxed once by the overseas nation and then they could repatriate their earnings without penalty. One or two trillion dollars would return to the United States next year bringing reductions in debt, new investments, jobs and growth. A real stimulus program, not one run by politicians, but by men and women who earned that money in the first place.
Increasing the cash flow of every major company in America, repatriating trillions in overseas earnings back to the U.S. and lifting the tax burden on 30 million smaller businesses is a recipe for growth, new jobs and wealth creation.
But wait. There is more.
On the individual side the personal income tax standard deduction will increase from $6,000 to $12,000 and for married couples increase from $12,000 to $24,000. The first $24,000 of income for a married couple is free of federal income tax. The tax rate is zero.
The plan collapses the present seven rates that go as high as 39.6 percent down to four rates: Zero, 12 percent, 25 percent and 35 percent. The present 10 percent rate moves to zero.
The death tax is finally put to rest. Those foolish enough to die will no longer be taxed.
The Alternative Minimum Tax — invented by Ted Kennedy and Richard Nixon in 1969 — was supposed to hit 115 millionaires who paid little in taxes and now catches millions in its web. This tax is eliminated.
So who benefits most from the tax cut?
Answer: Those Americans who could not find a job during the Obama years. The unemployed and underemployed. The biggest winners will be the millions of Americans who enter the work force for the first time in their lives or re-enter after giving up during the lean years.
But can the Republicans pass tax reform? It will be a large bill with many moving parts. They came one vote short in the Senate of repealing much of Obamacare. Might that happen again?
The good news is that cutting taxes is a consensus issue in the modern Republican Party. Ronald Reagan did that. It took time. The Taxpayer Protection Pledge shared with all candidates by Americans for Tax Reform has been signed by more than 90 percent of congressional Republicans. Republicans will not raise your taxes (though they may invade small countries they cannot pronounce) and they will cut taxes when possible.
The House will hold hearings and put the outline into legislative language by the end of October. The Senate will go to work and put together its version by Thanksgiving. And then the two versions go to conference and a final bill will be signed by President Trump before Christmas.
The politics of this three-month battle to cut taxes will define the 2018 elections. Democrats will now spend three months attacking the very idea of reducing taxes on 30 million small businessmen and women. They vote. They have spouses and families. Every week will bring an announcement by the Fortune 500 companies about how much money they are bringing back to the United States and how they will invest it. All Americans who pay taxes will see their take-home pay increase, their rates reduced and their standard deduction doubled. And then the increasing employment numbers will be released every first Friday of the month from January 2018 through the November election. We can see the future from here and it looks good.
Grover Norquist is president of Americans for Tax Reform. Twitter: @GroverNorquist