Trumps Incentive-Packed Tax Plan

By Larry Kudlow Much as he did in his command performance before the United Nations when he took back control of U.S. foreign policy President Donald Trump has seized and energized the tax cut issue. Almost daily he is pounding away on the themes of faster economic growth and more take-home pay arguing that his plan will make Americas economy great again. This is Trumpian leadership at its best. Under my administration Trump just told the National Association of Manufacturers the era of economic surrender is over. The Trump plan would slash large- and small-business tax rates double the standard deduction for middle-income folks make the whole tax code simpler by eliminating unnecessary deductions repeal the death tax and end the alternative minimum tax. As usual Democrats say the presidents plan is a handout to the rich. But in a recent speech in Indianapolis Trump asked: Why cant this be a bipartisan tax cut bill? He even quoted Democrat John F. Kennedy who said The right kind of tax cut at the right time ... is the most effective measure that this government could take to spur our economy forward. He also reminded his audience that President Reagans tax cuts were passed with significant bipartisan majorities. But todays Democrats have written JFKs tax story out of the history books (never mind Reagans). Key tax-writing committees are now polishing the Trump plan fine-tuning it to pass the Senate with 51 votes. But there are a couple of key points that need clarifying. The argument that the U.S. is doomed to two percent or less growth -- secular stagnation no matter what we do in terms of tax policy -- is nonsense. Across-the-board tax cuts produced 5 percent annual growth during the JFK period. And after tax cuts were fully implemented in 1983 real growth averaged 4.6 percent for the remainder of Reagans presidency. Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn are touting the three percent growth scenario saying it will pay for the tax cuts. But the naysayers refuse to admit that tax rate incentives matter. OK lets take one example from the Trump tax plan. Corporations today are taxed at 35 percent. That means for every extra dollar of profit a company keeps 65 cents. But the president has agreed to a 20 percent corporate tax rate. So for the extra dollar earned the private company would keep 80 cents. Thats a massive 23 percent incentive reward. Do we really think businesses will not be affected by this? That defies logic. And as supply-side mentor Art Laffer points out the incentive reward of a lower business tax rate will reduce tax avoidance and sheltering. Its another solid point mainstream economists continue to ignore. But the incentive effects dont stop there. The key to wage growth is productivity. Think of it as efficiency. And large and small businesses need new capital investment to modernize equipment and better train an efficient workforce. Yet real wages have barely increased since 2000 alongside virtually no productivity increases and a huge slump in capital formation. Thats the missing link between a two and a three percent economy. Rather than punish investment the Trump plan will spur growth across the board. Everyone will benefit. The supply-side incentive effect also includes the repatriation of trillions of U.S. company dollars lodged overseas to avoid taxes as well as 100 percent expensing write-offs for new investment of any kind. Taken together this plan contains a mountain of incentives. On the individual side the sleeper tax detail is the doubling of the standard deduction. As my CNBC colleague Jake Novak points out this is a huge positive for young millennials (who dont own much) and folks with no mortgages or homes. It puts more cash in workers pockets simplifies the code and means that near 80 percent of taxpayers wont have any deductions. Slimming income-tax rates from seven to three brackets and cutting income-tax rates in general add even more supply-side incentives to the Trump package. More money for rich people? Well the not-rich family of four will be a lot better off with a $24000 standard deduction. And the center-right Tax Foundation calculates that the bottom 80 percent of households get a lower tax burden while the top 20 percent get a higher burden. The Republican Party has got to win this issue preferably this year. So a warning: The GOP cannot let archaic process rules prevent good policy. Rules can be changed. CBO estimates can be ignored. Parliamentarian decisions can be overridden. Play hardball GOP. JFK did it. Reagan did it. And now you have Donald Trump doing it -- using all his energy to get a big tax cut that will return prosperity to Americas workers and families and enhance our strength overseas.