The Bush Growth Plan

UT Dallas_tex_orangeWSJ, Editorial Board

Tax reform that would cut rates and unleash business investment.

BN-KF618_edp091_M_20150909171535Conventional politics says presidential candidates should keep their tax reform plans gauzy and nonspecific. So much for that. Jeb Bush on Wednesday rolled out a tax plan that is remarkably detailed, including the tax deductions he’d eliminate in return for cutting rates to spur faster economic growth.

The former Florida Governor has made reviving growth and raising wages his main policy goals, and the tax plan is his first down payment on getting there. These are the right goals given six years of tepid growth and median household income that is still lower than when the expansion began in 2009. Faster growth than 2% a year is crucial to solving every other problem—from drawing more Americans back into the workforce, to reducing poverty, to financing U.S. defenses against growing global threats.

Tax reform is essential to reviving growth, but the danger is that it can become a slogan that masks bad policy. Hillary Clinton’s reform idea is to raise taxes on capital investment, which would harm growth. Some GOP “reformacons” want to play on Democratic turf and redistribute income via tax credits, which does nothing for growth.

The point is that the reform details matter, and Mr. Bush’s proposal is a vast improvement on the current tax code that would give the economy a huge lift. His brain trust includes four economists— John Cogan, Martin Feldstein, Glenn Hubbard and Kevin Warsh—who have spent years thinking about taxes and have written often for these pages.

The pro-growth news starts with a sharp reduction in marginal tax rates on individual and corporate income. Mr. Bush would take the top personal rate down to 28% from well above 40% now (including surcharges and phase-outs), while the top corporate rate would go to 20% from 35%. These are big cuts that would have a major impact on the incentive to work and invest.

Liberal economists argue that marginal rates don’t matter now that they are no longer above 50%. But the Reagan reform of 1986—which Mr. Bush cites as a precedent—cut the top rate to 28% from 50%. That reform helped to sustain the 1980s economic boom and set the stage for growth through the 1990s.

Mr. Bush’s corporate rate cut would move the U.S. from the developed world’s highest to below the median. He’d move to a territorial system that would let businesses pay taxes in the country where income is earned, and he would apply a one-time tax hit of 8.75% (payable over 10 years) on the $2.1 trillion in income that companies keep abroad to avoid the punishing U.S. rate.

The GOP candidate would also turbocharge capital spending by letting businesses deduct 100% of new investment immediately. This would eliminate complicated depreciation schedules that often distort investment choices. It also targets a major weak spot in this recovery, which is capital spending. All of this would increase the return on capital investment, which would flow to workers in higher wages.

The Bush economists argue conservatively that about 50% of the corporate tax burden hits workers, and they estimate that the Bush tax and regulatory reforms would lift average compensation by $2,750 a year by 2020 and $6,200 by 2025 (in 2015 dollars). This is how faster growth lifts everyone far more than does liberal or conservative income redistribution.

In return for this rate-cutting, Mr. Bush proposes to limit deductions and eliminate loopholes—including some political favorites. On the personal side, he’d kill the federal tax write-off for state and local taxes. This won’t go down well in liberal California or New York, but it means taxpayers in low-tax states would no longer have to subsidize profligate government. It would also give Mr. Bush a big bargaining chip with Congress if he becomes President.

Mr. Bush makes the mistake of preserving the charitable deduction, out of a belief that private charity reduces the need for government. But Americans are generous and don’t need a tax break to donate if tax rates are low enough. It also benefits the wealthy more than average taxpayers.

The better news is that Mr. Bush adopts Mr. Feldstein’s proposal to cap all other deductions combined at 2% of adjusted gross income. So taxpayers could still take the mortgage-interest and other deductions, but only up to the cap. Most taxpayers wouldn’t itemize under the Bush plan because he would also double the standard deduction, and the cap is progressive because it would squeeze taxpayers more as their income rises.

Mr. Bush’s most daring proposal is to kill the deduction for business interest expense. Economists have long believed that the U.S. tax code favors debt over equity, and Mr. Bush says he wants to level the playing field. This will upset businesses that run on leverage, but the tax code should be neutral toward business financing decisions. Deducting interest plus 100% expensing would also mean some businesses would have a negative tax rate.

Mr. Bush and his advisers acknowledge that all of this would raise less federal revenue than current law under conventional Washington scoring that assumes no increase in economic growth. But in the real world, unlike Washington, people and companies will respond to better incentives, the economy will grow faster, and over time government revenues will grow faster than without reform.

Mr. Bush also promises a regulatory reform proposal this year, and his advisers predict that his regulatory and tax reforms together would increase GDP by about 0.8% a year for a decade. We’d argue that’s conservative, and the lesson of the 1980s and 1990s is that 4% growth is possible.

Naturally, liberals will denounce the Bush plan as a tax cut for the rich, but with fewer deductions many affluent Americans will pay more. The two-term Governor also eliminates the lower tax rate for hedge-fund carried interest, not that the left will give him any credit for it.

The obvious retort is that six years of President Obama’s higher taxes and income redistribution have produced less growth and more inequality. The only way to raise American wages and lift the poor and middle class is with faster economic growth, which requires unleashing the pent-up productive capacity of American workers and business.

Mr. Bush will have to sell his plan in the crowded GOP field, but perhaps his policy seriousness will steer Republicans away from this summer’s sloganeering and toward a debate about what really would make America great again.


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