Conservatives’ Arguments for the New House GOP Tax Plan: A Robust Economic Defense

Conservatives are no strangers to advocating for tax reforms that protect business interests and promote economic growth. The newly proposed House GOP tax plan is gaining traction among policymakers and thought leaders, and one significant argument supporting this plan is its potential to raise economic growth.

The Context and Skepticism

While the tax plan garners attention, it is important to look beyond partisan rhetoric and consider the broader economic implications. As discussed in Episode 387 of the podcast, 'The No-Brainer Economic Platform,'

Five economists with differing political views converged to discuss the effects of one component of the GOP plan. They highlight the corporate income tax, which currently stands as one of the highest in the world, at 35%. Critics argue that such hefty taxes hurt middle-class voters, while removing them entirely for corporations may be seen as inequitable. The breadth of opinions indicates the complex nature of economic decision-making in policy formation.

The Conservative Case for Reforms

Conservative economists argue that the GOP tax bill aims to reduce corporate tax rates to align with global standards, a move they believe will enhance economic activity and growth. According to the Wall Street Journal, a letter from a group of prominent conservative economists to Secretary Mnuchin succinctly lays out the rationale for these changes.

Key Arguments for Economic Growth

The economists argue that fundamental tax reform, such as reducing corporate tax rates and introducing immediate expensing of equipment, aligns with traditional principles of public finance.

Reducing the User Cost of Capital

A key concept in the economic argument for tax reform is the 'user cost of capital,' which measures the expected cost of firms making additional investments. Reducing this cost through policies such as expensing (where firms deduct the full cost of investment at the time of purchase) and lowering corporate tax rates can increase output in both the short-term and long-term.

Quantifiable Economic Impact

Based on extensive scholarly research, many economists believe that reducing the cost of capital by 10% can lead to a 10% increase in investment. If a reduction in corporate tax rates to 20% is combined with immediate expensing, it can reduce the user cost of capital by about 15%, which could increase the demand for capital by the same percentage. This, in turn, is predicted to raise the level of GDP in the long run by approximately 4%. Over a decade, the increase in GDP growth rate could be around 0.4 per year, and even higher if the expensing period is extended.

Global Competitive Advantage

The reduced user cost of capital can also make the U.S. more attractive for both domestic and foreign multinational corporations to invest, thus stimulating economic activity.

Additionally, the letter highlights that these reforms would have minimal effects on federal debt and interest rates, as the U.S. operates in an international capital market where the impact of investment demand and borrowing is likely to be relatively small.

Individual Tax Reforms

Alongside corporate tax reforms, the House and Senate bills also propose reductions in individual tax rates, which would increase labor supply and taxable income. This would, in turn, increase tax revenues.

Conclusion

These fundamental tax reforms, endorsed by leading economists, aim to create a more favorable business environment, increase investment, and ultimately boost economic growth. While there may be uncertainties and counterarguments, the significant body of research and expert support suggests that these changes could have substantial positive effects on long-run GDP.

A Word from the Experts

The letter to Secretary Mnuchin emphasizes the importance of confirming the pro-growth objective for the path forward. The panel of expert economists, including Robert J. Barro, Paul M. Warburg, and Michael J. Boskin, among others, collectively argue that the reforms in the House and Senate bills would enhance economic prospects and, in turn, result in greater federal tax revenues, offsetting the losses from the tax reforms.

In conclusion, while the Republican tax plan faces skepticism and criticism, the economic arguments presented by leading conservative economists provide a robust defense of its potential benefits. The focus on reducing the user cost of capital, expanding expensing, and lowering corporate tax rates, combined with individual tax reforms, presents a compelling case for economic growth and prosperity.