Tax Cut 2.0: Economic policy must create new capital for expansion

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It appears that 2018 will be the first year since 2005 that annual economic growth will be at least 3%. Considering the 13 year period of economic stagnation, 3% is welcome growth. But growth could and should be higher. Tax Cut 2.0 Economic policy should stimulate even higher rates of growth.

The result of slow economic growth has been devastating. The lack of growth provides few opportunities. Millions of college graduates are underemployed. This means that graduates were accepting lower skill jobs which did not require a college degree. Thus leading many, particularly those with high college debt, to question the value of a college degree.

Has America’s economics led to a less educated workforce

With college grads taking jobs normally left for the unskilled, millions of workers without a college degree found no opportunity at all. They simply became so discouraged with their futile job search that they dropped out of the labor market.

There are currently more than 5 million discouraged workers.

The policy of the prior administration made it easy for workers to stay out of the workforce. Increases in social benefits, like food stamps increased and welfare, free health care and other benefits for women and children, keeps idle workers idle and out of the labor force.

Long-term idle workers can lead to social problems, drug trafficking, crime and sex trafficking.

America needs strong economic growth

President Trump knew that. When he took office his economic policy actions brought the annual economic growth of more than 3% and eventually higher. Trump, through executive order, removed thousands of growth-stifling regulations. He then convinced Congress to lower the personal and corporate income tax rates.

Since the US has a capital-intensive economy, more capital increases the growth rate. That’s why Congress cut tax rates for all Americans, including the highest income earners. Congress also cut the corporate tax rate from an average of about 35% to 21%. Since the tax cut took effect, the economy has averaged almost a 3 ½% growth rate.

Creating New Capital for Americans

After paying taxes with what is left is a taxpayers disposable income. This is the money spent on housing, food, and living expenses, like gas for the car or public transportation. However, with a strong economy, more disposable income means high savings and investment rates. Thus creating new capital for expansion.

The average Americans save less than a few thousand dollars per year, so the middle-class is not creating a lot of new investment or savings capital. Higher-income earners have more to save or invest and they are creating the new capital economic recovery requires. This is why Congress cut taxes for the highest income earners, thus leading to the new capital creation. This is important to fueling the higher growth rate we see today.

Tax Cut 2.0: Cutting the corporate tax rate an engine to additional capital creation.

Despite cries to the contrary, when corporations pay less in taxes, they are able to use that money for expansion — meaning more jobs. Whether the corporation invests the new capital itself or whether they buy back stock or increase dividends, the newly created capital is invested back into the economy.

Tax Cut 2.0 should do even more to create capital for expansion. If done properly economic growth could accelerate, perhaps hitting a 4% or 5% or higher annual rate. In 1984, two years after the Reagan tax cut took effect, annual economic growth exceeded 7 %.

Creating new capital for expansion.

One way to create new capital is to lower the top personal income tax bracket from the current level of 37% down to 30% or even 28%. Reagan lowered the top rate to 28% and the economy continued its strong growth pattern. Tax Cut 2.0 can do the same.

The second action would be to lower the capital gains tax rate from the current 20% (for high-income earners) to 15% for all income earners, which is a historical norm during many high growth periods. Reducing the capital gains tax rate would have an added benefit of increasing capital gains tax revenue. This was the case when President Bill Clinton lowered the capital gains tax rate from 28% to 20% in 1996.

Of course, this action may be impossible since the Democrats will control the House of Representatives starting in January. The Dems will say that lowering the top personal income tax rate and reducing the capital gains tax rate are just ploys to reduce taxes on the wealthy. “This is just another Republican tax break for the rich,” the Dems will cry.

The reality is that the opposite is true. While the rate may reduce the taxes paid by the wealthy, capital will increase. Isn’t 15% of $1,500 ($225) larger than 20% of $1,000 ($200)? While the rate is lower, the taxable income increase so the tax dollars increase.

The goal of this policy is to stimulate more economic growth and increase tax revenue.

It has been a long time since Americans experienced true economic prosperity.

Annual economic growth hasn’t exceeded 4% since the year 2000. By creating more capital for our capital-intensive economy, we could see much higher growth rates. That would lead to more opportunity, better jobs, higher income, more tax revenue and a return to real prosperity.

That’s what needed today.

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years. @mbusler

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