Democrats believe boosting welfare — free health care, subsidized housing and food stamps for able-bodied adults who refuse to work — is the road to growth. Republicans believe giving money back to folks who earned it is the better path.
The Obama recovery gave us 2.1 percent growth. If a reconciled bill from the House and Senate is signed into law, we will see if President Reagan’s magic still works. He got better than 4 percent growth from tax cuts and deregulation.
The Republican plan eliminates a lot of exemptions and deductions, and applies the savings plus another $1.4 trillion over 10 years to lower rates. The benefits are broadly spread — contrary to the invectives from Democratic leaders Charles Schumer and Nancy Pelosi, the plan will cut the federal bite for more than 90 percent of taxpayers in 2019.
Americans have a proud tradition dating back to Thomas Jefferson: put more money in their pockets and they spend it. These days, that means a nice boost for restaurants, auto dealers and perhaps in applications at my university or at least on what’s really important — sales of football and basketball tickets and mugs, T-shirts and other paraphernalia at the college bookstore.
Any way you slice it, that’s just like President Obama handing out more food stamps, but this time the money goes to hardworking families instead of indolent computer game aficionados.
Slashing the corporate tax rate from 35 percent to 20 percent, along with some other changes in levies on foreign income, would put U.S. businesses on a more level playing field with competitors in Europe and Asia. That will make America a more attractive location for factories and research and development, and stop the hemorrhaging from U.S. drug and other companies relocating to Ireland, the United Kingdom and Bermuda to avoid the present draconian treatment of profits in the United States.
Again, contrary to the talking heads and the professional left in the media, sound econometric evidence indicates cutting business taxes boosts investment — even if not as much as the exaggerated claims of White House Chief Economist Kevin Hassett.
The work of academic researchers without strong partisan interests indicates a 15 percent cut in taxes on business profits should increase investment between 7.5 and 15 percent. And in the current environment of deregulation, the higher figure should more closely apply.
The staff of the Joint Committee on Taxation estimates that a one-time boost to the level of consumer spending and the dynamic growth effects of an improved investment environment should increase gross domestic product by 0.8 percent and generate about $400 billion in net new revenue. Hence, over 10 years, the Republican tax plan would increase the deficit by about $1 trillion.
That’s something the country can’t afford — or can it?
In economists’ parlance, the Joint Committee on Taxation appears to be using very conservative multipliers to estimate the impact of lower taxes on consumer and investment spending, especially considering that European governments have been cutting corporate rates in recent years. Using more moderate estimates, I come up with additional growth of 1.9 percent and $670 billion in new revenue.
Apart from quibbling about those figures, something more profound is happening and has gone largely unnoticed during the tax-cut theatrics: A new optimism has taken hold, much as it did when Reagan was elected.
Washington has become decidedly less hostile toward private enterprise, and American businesses are moving more aggressively to exploit innovations like artificial intelligence that boost worker productivity and GDP growth.
For three quarters running, the economy has been banging along at 3 percent growth — despite record damage from western wildfires and hurricanes in Florida and Texas. Even without a tax cut, but factoring in a customarily slow winter quarter, it seems that annual economic growth has shifted up to 2.5 percent, and that should produce an additional $800 billion to $1 trillion in tax revenue over the next decade.
In 2020, the Democratic presidential nominee will have a tough time running against a Trump economy that put more money in Americans’ pockets — both from tax cuts and higher wages — and with a federal deficit in much better shape.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.