Hey, Democrats: It's okay to like tax cuts
Remember when Obama wanted to do it?
Just because President Trump supports an idea doesn't necessarily mean it's terrible.
This is a problem for Democrats. They hate the tax framework devised by the Trump White House and GOP congressional leaders. They have slammed the blueprint for giving massive tax breaks to rich Americans and highly profitable corporations. House Minority Leader Nancy Pelosi even used the #NotOnePenny hashtag in a tweet attacking the plan. That group wants politicians to pledge opposition to "any effort to cut taxes for the wealthy and well-connected. Not one penny in tax cuts for millionaires, billionaires, and wealthy corporations."
So where does this leave the Democratic Party, exactly? Will the default consensus Democratic/liberal/progressive position soon be — if it isn't already — that tax rates simply don't matter except to redistribute wealth and income, and that tax reform is ever and always some neoliberal scam? It's all just "trickle-down" economics, right? It is certainly my sense that the left is moving hard in that direction.
If so, that would be worrisome since the American economy really does need corporate tax reform.
Yes, Trump and Paul Ryan are correct about that bit of the plan. The U.S. has the highest statutory tax rate among advanced economies and the fourth-highest effective corporate tax rate, according to the Congressional Budget Office. The latest World Economic Forum competitiveness report identifies tax rates as the most "problematic factor" for doing business in America. With business investment a particularly weak part of the post-financial crisis economy, smart reform would encourage domestic investment and reduce incentives for corporations to move overseas. None of this should be controversial. Of course, everything in the age of Trump is controversial.
Now, it's true American companies have plenty of cash these days, while low interest rates make borrowing cheap. So maybe companies aren't investing because of activist pressure to pay dividends or because CEOs are gloomy about the future growth prospects of their sector or the overall economy. Still, economic theory suggests tax reform that lowers rates or lets companies immediately expense new investment should make them willing to invest more because more projects are now profitable on an after-tax basis, the Tax Foundation's Kyle Pomerleau explained in a recent note. Indeed, OECD research has found corporate taxes to be the most harmful sort of taxes for growth.
And it wasn't so long ago that Democrats also wanted to cut corporate tax rates. In 2015, President Obama proposed axing tax breaks and loopholes, but not to fund Medicare for all or free college tuition. Nope, he wanted to pay for slashing the corporate tax rate to 28 percent from 35 percent. Obama considered business tax reform a key part of his investment agenda. But neither Hillary Clinton nor Bernie Sanders advocated doing the same during the 2016 campaign. The party, or at least its activist base, had moved on.
But it's hard to blame Democrats for developing a knee-jerk revulsion against tax reform given how Republicans are badly distorting it.
Sound tax reform encourages new work, savings, and investment rather than providing windfalls to previous or existing activity. It levels the playing field across different business sectors and different kinds of income and consumption. And it doesn't worsen budget deficits by much, if at all.
The still embryonic Trump plan raises questions on all those accounts. But its fiscal frivolousness is perhaps the most troublesome. Preliminary analysis from both the Tax Policy Center and the Committee for a Responsible Federal Budget estimate a more than $2 trillion revenue shortfall over a decade. And neither thinks stronger growth would close the gap.
Then again, maybe this is a feature rather than a bug to the Trumpublicans. As White House budget boss Mick Mulvaney said on Sunday, "We need to have new deficits" to get the economy growing at 3 percent. (During the Obama years, of course, Republicans warned the big deficits would spark a second financial crisis.)
But Mulvaney is wrong. The best part of the Republican tax plan is the sharp cut in the corporate tax rate, suboptimal as it is. Paying for it, say through higher investment taxes or reducing or scaling back other tax breaks that benefit wealthier families, is critical to its growth potential. Or even better, focus the corporate tax cut on immediate expensing to benefit new investment. More bang for the buck that way. Then add a means-tested payroll tax cut for working-class families. Finally, toss in an expansion of the Earned Income Tax Credit.
These are all tax cuts that mainstream Democrats should be able to support, if paid for. Republicans, too. And Democrats should welcome that, even if one of them is Trump.