This past week Presidential candidate Donald Trump laid out his economic plan at the Detroit Economic Club. We liked it. A lot. Since the topic is financial and applicable to everyone, I have decided to weigh in with my analysis.
What really caught our attention was the maximum corporate tax rate of 15%, which Trump pledged that no business in America would exceed under his plan. Contrasted with today’s top corporate rate of 35%, this is a windfall for all of the American people. That’s right, the American people, not Big American Corporations. Here’s why; tax cuts work every time they are tried. By “work,” I mean they create investment and jobs, resulting in more revenue for the government, reducing federal deficits, and benefitting society as a whole in several ways. Lower tax rates result in higher tax revenue.
Before explaining all the economic benefits, some background is in order. The history of tax cuts, along with their consequent effects on the Federal budget, are explained thoroughly in Daniel J. Mitchell’s book Background, The Historical Lessons of Lower Tax Rates, published 20 years ago in 1996. In the book, Mitchell explores tax rate cuts in the 1920s, the 1960s, and the 1980s. It is a shame that he didn’t write a sequel for the rate cuts in the early 21st Century, but I’ll cover that separately.
During the 1920s, top tax rates fell from over 70% to under 25%. Personal income tax revenues rose sharply, from $719 Million in 1921 to $1,164 Million in 1928, an increase of 61%. Andrew Mellon, Secretary of the Treasury in the 1920s, explained that high rates had been pushing capital into nonproductive, tax-exempt, interest-paying investments. Lower rates brought that money back into more productive taxable enterprises.
Starting in the 1930s, Hoover and Roosevelt pushed tax rates ever higher, with the top personal marginal rate finally exceeding 90%. John Kennedy recognized the damage being done by the exorbitant rates, and gave an impassioned speech explaining that lower rates would increase revenue. Congress listened, lowered rates, and he was proven correct, as tax revenues rose from $94 Billion in 1961 to $153 Billion in 1968, an increase of 62%.
Effective income tax rates rose steadily under Jimmy Carter, though not all due to Congressional action. The 1970s introduced the phenomenon of hyperinflation, which resulted in “bracket creep,” which began to raise taxes sharply on Americans everywhere. Tax brackets were not indexed for inflation, but wages and salaries were rising, due mostly to inflationary pressures. As taxpayers found themselves in higher and higher brackets, some people even rejected promotions and pay increases, as they would wind up taking home less money.
Along came Ronald Reagan in his Presidential campaign of 1980, once again explaining to the people that the problem was high taxes. He was elected, rates were cut (although not as quickly as they should have been), and the results were predictable. Revenue rose by 99.4% during the 1980s, and as I remember very well, most of us felt incentivized to work hard, take risks, and pay taxes, because we got to keep the bulk of what we earned.
Income tax rates are catnip to politicians, who seem to be born with the irresistible urge to “do something.” This is the source of many of the problems we have today, whether economic or social. One politician perceives a problem, which creates an opportunity to influence another voter for the party (or individual), and so starts a discussion about how to fix that perceived problem. The results are evident everywhere, and always remind me of the old expression that a camel is a racehorse designed by a committee.
For several years, tax rates again started to climb, and deficits grew. George W. Bush saw the light, and was elected partly due to his promises to cut taxes, which he did in 2001, and again in 2003. Again, the results were predictable. Revenues rose after tax rates fell. The economy grew.
Donald Trump believes that tax cuts work for everyone. In the State of New York, where both major candidates currently reside, the very liberal governor and government are relentlessly advertising opportunities for businesses to move to New York, due to “the lowest taxes in years.” Why, unless it works, would New York State be spending huge advertising money to promote a low-tax environment, unless, of course, they know the truth? Logically, if New York State knows the truth, how is it that one of the New York-based candidates (hint: the female one) doesn’t realize this simple fact?
For nearly eight years now, Americans have been devastated by the worst “recovery” in about 80 years. A growth rate of 1% does not describe the robust recover the current Administration claims. High taxes, excessive spending, and over-regulation have produced economic stagnation. The proven results of the Reagan years, with lower taxes and higher growth, can be repeated. If we make it happen.
The Trump Plan itself is not perfect, but it represents a good start. Today, so-called “repatriated” cash, which represents corporate profits earned and already taxed by the country in which it was earned, is heavily taxed by us upon repatriation back to the USA. No wonder it tends to stay abroad, since bringing it home allows Uncle Sam to impose another 35% tax on that money. Trump’s plan would reduce that repatriation tax to 10%. Steve’s plan would reduce it to ZERO, but I’m not running.
Alongside corporate tax rate cuts, trump’s plan would lower personal tax rates. This would leave more disposable income in the hands of Americans, who will, if recent history is any indication, spend some, and use the rest to reduce some debt. Sounds like a win/win situation to me. All in all, a very fine proposal.