Senator Pat Toomey (R-PA) rightly characterizes President Trump’s tax reform plan as one that will result in well-paying jobs --“The best economic stimulus for the middle class,” he said in a statement.
He also noted that massive increases in government spending and nearly $2 trillion in taxes under President Obama delivered the opposite: “The slowest lowest post-recession recovery since World War II, weak job growth, and stagnant household income.”
The good news is that many see broad support in Congress for at least portions of the president’s plan, especially in areas where our nation’s taxes are so glaringly out of sync with the rest of the industrialized world.
“On the corporate side, there is a broad agreement that we need a lower corporate rate, which in some instances at nearly 40 percent is by far the highest in the world, and that we should move to a territorial tax where we’re not taxing income earned in foreign countries,” said Karl A. Frieden, Vice President, and General Counsel of the Council On State Taxation (COST).
The bad news is that many in Congress are likely to insist that the plan, at least on paper, remain revenue neutral, potentially opening the door for tax increases in other areas.
Key provisions of the plan would drop the corporate rate to 15 percent and, under it, we would move to a territorial system.
On the personal level, the administration wants to double the standard deduction, or the amount of income individuals and families can report to the IRS tax-free.
The current standard deduction would rise from $6,300 to $12,600 for individuals, and for married couples filing jointly, it would rise $12,600 to roughly $24,000.
“The combination of personal and business rate cuts and structural reform will result in precisely the level of investment the American economy needs to finally move away from years of sluggish growth,” said David N. Taylor, President, PMA.
Some economists believe a revenue neutral plan is entirely unnecessary. David Burton, Senior Fellow in Economic Policy at the Heritage Foundation, says that Congress is being mislead by its Joint Committee On Taxation; it dramatically undervalues the dynamic scoring model, one that measures the ensuing economic growth from tax reform.
“The potential gains to the economy from achieving tax reform are very large—a 10 percent increase in GDP over 10 years for an imperfect but well-structured plan,” Burton said.”This would mean a cumulative 10-year economic output gain of approximately $13 trillion to the American people.”
Burton further said in a recent policy piece for Heritage, “A Guide to Tax Reform in the 115th Congress,” that investments in the U.S. would skyrocket under a competitive and fair tax plan.
“Our high corporate rate makes it unattractive for businesses, both foreign and domestic, to locate new investment in the U.S. And the lack of a territorial tax creates another disincentive for U.S. businesses to invest, which further suppresses wage growth and job creation for American workers,” he wrote.
He added that he worldwide system also makes it attractive for foreign firms to buy U.S. firms, or for U.S. firms to merge with foreign corporations and move the new company’s headquarters abroad. And the U.S. tax code denies businesses the ability to deduct the full cost of investments at the time businesses make them.
The economic drag over the past eight years has become the new norm, but a needless one, says White House Budget Director Mick Mulvaney.
“I think what we have forgotten for the last decade is that America used to be a fast-growing economy. If you look over the course of our 200-plus years, we’re supposed to grow at about 3 percent, on average, and that’s where we have been since World War II, at the very least, even further back than that.
He continued: “But, for the last decade, we have been growing at less than 2 percent. That doesn’t sound like much, but if you think about it in terms of the power of compound interest, when you take an economy our size that only grows 2 percent a year for a decade, instead of 3 percent a year, the difference between those things are tremendous.
A House GOP plan unveiled in June of 2016 offers many of the same reforms, though it’s not without its controversies including a border adjustment tax that is not part of the president’s plan.
Increasing other taxes to “balance” the plan would only work to reduce potential new investments. One tax increase, for instance, that was discussed all the way back during the debate of the Affordable Care Act in 2010, and is still being mentioned, is the so-called “Ad Tax.” One proposal would slash the allowable deductible amount for advertising, both digital and traditional, in half.
The National Association of Broadcasters (NAB) says that the economic damage from the Ad Tax would spread far beyond broadcasting and the advertising world.
“Manufacturers, retailers virtually all businesses would be affected adversely by the tax,” said Grisella Martinez, Vice President, Government Relations, NAB.
The group created a one-page fact sheet “BAAD TAX” that for each state shows the benefits of the 100 percent deduction, and resulting economic wreckage if it’s chopped in half.
In Pennsylvania, ad expenditures generate $222.2 billion — a whopping 15.5% of the Commonwealth’s economic activity. In addition, advertising helps produce 793,299 or 13.5% of all jobs in Pennsylvania. Broken down, $1 million spent on advertising supports 70 Pennsylvania jobs.
A stronger economy not only increases tax receipts at all government levels, but it means reduced spending on programs for the unemployed and under employed.
Approving an Ad Tax, or any other tax increase, to achieve revenue neutrality, on paper anyway, would only amount to a needless drag on that growth.