Sup­ply-Side Trumpo­nom­ics, Part Two: Tax Cuts

In a pre­vi­ous arti­cle, we looked at three pol­i­cy areas ripe for large “pos­i­tive sup­ply shocks” and a rapid return of the U.S. econ­o­my to a high-growth, low-infla­tion sit­u­a­tion: Ener­gy pro­duc­tion, tax cuts, and reg­u­la­tions.

First, Amer­i­cans could see a sig­nif­i­cant reduc­tion in ener­gy costs under Trump’s “drill, baby, drill” plan designed to unleash Amer­i­can “ener­gy dom­i­nance.” Next, we turn to phase two of Trump’s sup­ply-side suite, the tried-and-true tool of wide­spread tax reduc­tions.

Tax Cuts

To frame our dis­cus­sion of sup­ply-side tax cuts, let’s briefly review the “deter­mi­nants of sup­ply” — fac­tors that can shift a product’s sup­ply curve, sum­ma­rized by the acronym TTEP#: Tech­nol­o­gy, Tax­es, Expec­ta­tions, Price of resources, # of pro­duc­ers.

The area where gov­ern­ment can have a large and sud­den impact should be scream­ing­ly obvi­ous: tax­es.

Yes, tax­es are need­ed to fund essen­tial gov­ern­ment ser­vices. But econ­o­mists rec­og­nize that tax­es are costs. High­er sales tax­es raise the cost of goods; high­er income tax­es raise the cost of earn­ing a liv­ing; high­er cor­po­rate tax­es raise the cost of run­ning a busi­ness. Obvi­ous­ly, reduc­ing tax­es on work and pro­duc­tion (busi­ness and indi­vid­ual income tax­es) will reduce the over­all cost of pro­duc­ing goods, stim­u­lat­ing more work and pro­duc­tion, and thus shift­ing sup­ply curves to the right. Don­ald Trump under­stands this intu­itive­ly, which is why one of his sig­na­ture agen­da items in his first term was a large tax cut, par­tic­u­lar­ly focused on busi­ness (cor­po­rate) tax­a­tion, via the Tax Cuts and Jobs Act of 2017 (TCJA). 

Sup­ply-side tax cuts have been tried and found amaz­ing­ly suc­cess­ful on mul­ti­ple occa­sions in U.S. his­to­ry. Large income tax cuts in the 1920s (Mel­lon-Coolidge), 1960s (Kennedy-John­son), 1980s (Rea­gan), and 2017 (Trump) led to cor­re­spond­ing eco­nom­ic booms and strong growth in per­son­al income, out­put, and employ­ment. 

The his­to­ry and impact of these (and more) tax reforms was chron­i­cled by the God­fa­ther of mod­ern sup­ply-side eco­nom­ics, Arthur Laf­fer, with coau­thors Bri­an Domitro­vic and Jeanne Sin­que­field, in their recent book, “Tax­es Have Con­se­quences.” As I not­ed else­where, the authors doc­u­ment no less than five dis­tinct episodes of sig­nif­i­cant tax cut­ting, from Mellon’s aggres­sive 1920s rate cuts, to the 2017 Tax Cuts and Jobs Act, which Art Laf­fer him­self pro­mot­ed as an advi­sor to the Trump Admin­is­tra­tion. Each tax cut gen­er­at­ed an eco­nom­ic boom with above-trend GDP growth and (even­tu­al) increas­es in fed­er­al income tax rev­enue. “Tax­es Have Con­se­quences” is a fact-based, unas­sail­able chron­i­cle of the pow­er of tax rate reduc­tions and tax code sim­pli­fi­ca­tions to super­charge eco­nom­ic growth. 

Trump’s tax agen­da for 2025 has two big parts and sev­er­al small­er ones. The TCJA cuts are sched­uled to sun­set at the end of 2025, so the pri­or­i­ty will be mak­ing them per­ma­nent. The oth­er big tax change Trump pro­posed on the cam­paign trail is a fur­ther sig­nif­i­cant reduc­tion of the cor­po­rate income tax, from 21% down to a world-beat­ing 15%, con­tin­gent on cor­po­ra­tions promis­ing to onshore pro­duc­tion. Oth­er mea­sures of note include allow­ing 100% deduc­tion of most busi­ness invest­ment spend­ing, and elim­i­nat­ing tax­es on tips and Social Secu­ri­ty ben­e­fits. 

Skep­tics and doubters will, of course, bris­tle at fur­ther tax cuts. Left­ists will whine about “tax cuts for the rich” and pooh-pooh their favorite bogey­man of “trick­le down eco­nom­ics.” Even some wimpy con­ser­v­a­tives will argue that most of the tax cut juice was already squeezed out in Trump’s first-term reforms, and that fur­ther tax cuts risk sig­nif­i­cant increas­es in the fed­er­al deficit and debt. Trump knows from expe­ri­ence, how­ev­er, that tax cuts are still a pow­er­ful tool. After all, the top income tax rate right now is still 37%; Reagan’s reforms got us down to a top rate of just 28% by 1988, so there’s still room to cut.

As a world-class busi­ness­man, Trump knows that push­ing that cor­po­rate rate down even low­er can tur­bocharge busi­ness for­ma­tion and cap­i­tal spend­ing, the under­ly­ing fac­tors dri­ving growth in pro­duc­tiv­i­ty, jobs, and wages. When Trump first entered office in 2017, the U.S. cor­po­rate income tax was among the high­est in the world at 31%. Even with the TCJA reduc­tion to 21%, the U.S. still tax­es cor­po­rate prof­its at a high­er rate than most Euro­pean coun­tries. There’s much more room to trim these tax­es and improve America’s busi­ness cli­mate.

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As for the rev­enue & deficit impact: as Art Laf­fer reminds us, tax cuts have the poten­tial to boost gov­ern­ment rev­enue, as the “incen­tive to work/ earn more” effect can swamp the “gov­ern­ment gets a small­er slice of my pay­check” effect. 

Trump has also made state­ments about pos­si­bly off­set­ting income tax rev­enues with new tar­iffs, which is caus­ing heart­burn for some hard­core free-trade, lib­er­tar­i­an econ­o­mists. While I’m not a big fan of “pro­tec­tion­ist” tar­iffs, I think it’s smart to view Trump’s threat of tar­iffs as both a hard­ball nego­ti­at­ing tac­tic and part of a big­ger vision of pro-growth tax reform. Indeed, Trump has even made recent state­ments about elim­i­nat­ing the income tax alto­geth­er and replac­ing it with a pre-1913-style rev­enue tar­iff. Any free mar­ket econ­o­mist worth his salt should see such a move as the biggest pos­i­tive sup­ply shock in world his­to­ry. Income tax­es are one of the most cost­ly and eco­nom­i­cal­ly dis­tort­ing ways to raise rev­enue. Left­ists push­ing high tax rates have been open about using the income tax regime main­ly as a tool of social engi­neer­ing and redis­tri­b­u­tion, effi­cien­cy and incen­tives be damned. Reduc­tions in com­pli­ance costs alone would jus­ti­fy swap­ping the income tax for tar­iffs.

This kind of rad­i­cal reform is far off, but Trump’s over­all instincts are good here. Keep trim­ming away at tax­es on the work and invest­ment incomes of Amer­i­cans, and reap the ben­e­fits of boost­ing incen­tives for pro­duc­tion and cap­i­tal for­ma­tion. He did it before with 2017’s TCJA, and through a renewed focus on strate­gic tax cuts, he make America’s econ­o­my boom again.

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RELATED: Sup­ply-Side Trumpo­nom­ics, Part One: ‘Drill, Baby, Drill’

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Tyler Watts is a pro­fes­sor of eco­nom­ics at Fer­ris State Uni­ver­si­ty in Big Rapids, Michi­gan.

The views expressed in this piece are those of the author and do not nec­es­sar­i­ly rep­re­sent those of The Dai­ly Wire.