The Tax Reform Promise – WSJ

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The tax reform that will pass Congress Wednesday fulfills a major Republican campaign promise, but more important is that it marks a return to the politics of growth after many lean years of envy and income redistribution. It offers hope of broader prosperity after a decade of slow growth and rising inequality.

On the merits, the bill is the most pro-growth tax policy since the Reagan reforms of 1981 and 1986. We should add that it is not as good for individual taxpayers as those two acts. The bill cuts marginal tax rates only a little for individuals, and that will temper its growth impact. The politics of envy that has dominated American politics since the mid-2000s has also infected many Republicans, especially its Beltway intellectual class.

This reform will rise or fall on its business tax changes, and those are arguably superior to the 1986 act. The corporate rate cut to 21% from 35% solves a core problem of U.S. economic and business competitiveness. Along with 100% expensing, the rate cut slashes the cost of capital enough to cause CEOs to think again about America as a place to invest. Sweeping away many (alas, not all) special tax breaks means fewer incentives to misallocate capital.

The timing may also be right in giving this already long expansion a second wind. The Obama expansion has been so tepid in part due to historically slow capital investment, and deregulation and tax reform are policy levers designed to revive it.

The economists who gave us the slow Obama economy now say this reform is ill-timed, but they look only at the demand side of the economy. They ignore the bill’s supply-side incentives to increase the economy’s productive capacity. These incentives will be all the more important as the Federal Reserve moves to normalize the monetary policies that lifted stocks and other asset prices during the Obama years. The Obama policy mix helped the affluent who had assets, while faster growth should spread prosperity more broadly.

Will it work? There are wild cards to watch like the Fed, national security shocks and

Donald Trump’s

trade policy. But measured by business sentiment, the portents are good. The National Federation of Independent Business confidence index hit an all-time record in November, while optimism among manufacturers hit an unprecedented high in the fourth quarter. Mr. Trump is mistaken to focus so much on the stock market, since corrections are inevitable. But the market’s rise since Election Day in 2016 isn’t a political levitation act. It’s an omen of confidence in higher earnings and faster growth.

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As for the politics, reform’s passage shows the GOP’s growth wing is still prominent. This was no sure thing as conservative wonks fell for policy fads and sneered at pro-growth reform as irrelevant to the needs of the working class. In the end they watered down the reform but couldn’t hijack it.

This is a credit in particular to the successive House Ways and Means Chairmen who negotiated the reform tradeoffs. Dave Camp,

Paul Ryan

and

Kevin Brady

persisted through years of political setbacks for this moment, while Senate Majority Leader Mitch McConnell shrewdly tapped

Pat Toomey

of Pennsylvania to maneuver the bill through the Budget and (with

Orrin Hatch

) Finance committees. These are examples of how individual legislators make a difference.

The victory is also a vindication for these and other Republicans who resisted the advice not to work with President Trump. The GOP is supposedly forever morally tainted by trying to pass the agenda it ran on because Mr. Trump is, well, you know. But voters who elected a Republican Congress want results that are good for the country, and Americans shouldn’t suffer for four years because voters preferred Mr. Trump over

Hillary Clinton.

Mr. Trump deserves credit for selling reform and working with Congress to pass it.

Republicans succeeded despite a narrow Senate majority, no help from Democrats, and the near-universal hostility of the Beltway press. They also had to overcome the Keynesian bias embedded in such institutions as the Congressional Budget Office and Tax Policy Center that are treated as policy oracles when they merely offer guesses about policy outcomes that are often wrong. At least growth conservatives had the Tax Foundation as a counter-weight, but sooner or later they need to repeal the Budget and Impoundment Control Act of 1974.

***

The media are now chortling with Democrat Chuck Schumer that Republicans will “rue the day” they passed this. Actual CNN headline: “Public opposition to tax bill grows as vote approaches.”

But we’d dislike this bill too if all we knew was what the media reported. The polls show that most Americans don’t even think they’ll get a tax cut, when nearly all taxpayers will. Perhaps voters will find that irrelevant in 2018, but the result is certainly better for Republicans than explaining another legislative failure. The far more important payoff will be for the country if the result is a return to faster growth that lifts wages and American confidence.



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