Pro-Growth Tax Policy

Tax Policy

 

The modern tax system in the US traces its roots back to the first Civil War. It was in 1861 that President Abraham Lincoln signed the first federal income into law to raise funds for the Union war effort. The income tax back then was pegged at 3% on a minimum annual income of $800 and above.[1]

To manage and enforce the law, Congress created hat would soon become known as the Internal Revenue Service. Abraham Lincoln’s wartime taxes were done away with after the war, but its source of federal dollars was on the minds of progressive reformers.

The idea of taxation in the US itself is ironic because it was the relentless taxation by the British that led to the revolution in 1775. The newly formed American government was understandably cautious of implementing taxes.

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- Dr. George Flinn

Conservative Republican

U.S. Senate Candidate

"Our federal tax dollars need to promote our economic growth. Industrial expansion, whether it be new innovative products or bringing manufacturing jobs back to the U.S., an increase in production means an increase in jobs. This is what the tax policy of the U.S. should be focused on."

It is interesting to note that postcolonial America was always grappling with taxes in one form or another. The ‘no tax’ policy meant the Federal government had to rely on excise taxes and higher tariff duties. It took the Civil War to make America question its ‘no-tax’ policy in the Constitution. When Congress tried to impose another income tax following the Civil war in 1894, the Supreme Court ruled it unconstitutional with a 5-4 vote. Lastly, with the Sixteenth Amendment added to the U.S Constitution in 1913, authorizing the levying of a federal income tax, Congress wasted no time in imposing one and set taxes at 7% on annual incomes at a minimum of $500,000, which roughly equates to about $13 million today. [2]​

Pre- 1962 Era

 

Before World War I, and full implementation of the Income tax, less than 1% of Americans paid taxes. As war broke out and new tax laws adopted, the number of people paying taxes was raised to 5%. Prior to the income tax, most federal revenue was raised by excise business and estate profits taxes. The first cuts in income tax rates during the 1920s, was part of the stimulus of U.S. and global economic expansion of the decade.

 

Additionally, doing away with high rates on excise business taxes and estate taxes was profitable for the government. In 1918 alone, the federal government saw new revenue grow by $3.6 billion. Throughout the next 10 years as tax rates declined, revenue grew. 

The Roosevelt era brought with it the New Deal and WWII. Both of these endeavors required large amounts of revenue, and tax rates were again raised, reaching 40 percent. As rates rose, the economy stagnated, and it was not until limited war production was begun in 1938 and combined with the 1938 Revenue Act that the U.S economy actually saw real growth and expansion[1]

 

World War II needed to be financed, but the influx of federal dollars for war materials meant jobs. Also in effect during the war years, was the rationing policies, which limited personal spending. The raising of individual tax rates has little impact on economic growth, as spending was curtailed to basics for the individual, and war products for the government. During the war, Americans with annual incomes of $500 paid 23% in taxes and the government managed to tax 43 million Americans and increase its revenues from $9 billion in 1941 to $45 billion in 1945.

The Revenue Act of 1945

 

The government reduced top tax rates on corporations and individuals in the Revenue Act of 1945. Corporate rates dropped from 40 to 38 percent, and individual rates dropped to 86 percent from 94 percent. With the GIs returning from the war, relaxation of rationing, and pent up demand for automobiles, homes, appliances, and other consumer goods, the economy flourished. Understanding that the economies of England, France, Germany, Japan and to some extent the Soviet Union were tattered and torn, the U.S became the supplier of goods to the world in the immediate post war international markets. High employment, high demand, rising wages, were forces that were not dislocated due to high taxes, and so as individual and corporate taxes rose in the 1950s again those policies had little impact on economic growth. Additionally, both corporate and individual taxes were full of exemptions. Homes, interest, local taxes, health care, the list went on and on. So, while tax rates for the highest wage earners may have been 90 percent, exemptions brought the effective rates down the about 40 percent. Born in this time, was the phrase, the “Three Martini Lunch”, which you could right off your taxes.[1]

The 1962-1984 Era

 

The Early 1960s saw two tax bills. The Revenue Acts of 1962 and 1964. The 1962 act introduced the Investment Tax Credit, (ITC).[1] The ITC was intended to spur business investment and expansion and thus new job creation. It was a time where “war” babies were graduating high school, and seeking jobs, and the baby boomers were right behind them. The U.S. needed to create jobs, and the Democrat controlled Congress were finding more doors to open to spur spending and investment. To further that end, in 1964, Congress dropped the individual tax rate from 91 to 70 percent, and corporate rates from 52 to 48 percent. Also, introduced in the 1960s was increasing payroll taxes. These taxes paid for Social Security and Medicare.

The 1970s saw ever increasing inflation, reaching as high as 14 percent in 1980. The major spikes of the inflation were directly linked to the drastic increase in oil in 1974 and 1979. Tax rates remained the same during this time, but Washington was loving it. Incomes were rising fast, and two earner households were becoming the norm. Tax rates designed for the upper 10 percent of wage earners were now being applied to the middle class. And that interesting concept, introduced in 1962, the ITC, became the bane of the tax code. Tax attorneys were creating paper corporations for almost any concept, and directing funds into the companies as means of lowering taxable income. Increasingly the middle class bore the burden of federal revenue.[2]

In the ‘80s, with Republicans having taken control of the U.S. Senate, Ronald Reagan was able to reform the tax code and overall tax policy. Gone were the ITC, wholesale deductions for every conceivable type of write-off and in came reduced individual tax rates pegging the top rate at 28 percent. Corporate taxes were reduced from 48 to 40 percent. The changes brought about by the Economic Recovery Tax Act of 1981 and the Deficit Reduction Act of 1984, ended the “stagflation” of 1978-82, ended the 1981 recession and led to a decade long expansion of the U.S. Economy. Under these reforms, and since 1984, the top 10 percent of wage earner are responsible for a majority of federal revenue.[3]

Tax Reforms Under George W. Bush

 

Much of President Bush’s government was characterized by tax relief measures, often known as the “Bush Tax Cuts”. Put simply, the tax reforms made major changes to the tax code, lowering federal income tax rates, providing relief to married people, increasing the child tax credit, and lowering the tax rate on dividend income and capital gains taxes.

The Bush Tax Cuts eliminated taxes for many items, such as itemized deductions, exempted rates for higher-income individuals, and lowering the maximum estate tax.[1] President George W Bush’s main priority was to boost the economy during the recession that followed after the collapse of the dotcom bubble and 9/11. There were major repercussions for all parties involved with trillions in losses. 

Tax Reforms Under Barack Obama

 

The Bush tax cuts proved useful and certain provisions of the cuts were slated to expire in 2008 and 2010. But the economic recession in 2008 prompted the Obama administration to extend the tax cuts well into 2012. Because the tax cuts had been in effect for so many years, people started to feel they were permanent instead of being temporary. Both politicians and taxpayers alike raised an outcry as the Bush Tax Cuts approached their date of expiration. And even though the depth of economic recession was past, many people were still reeling in from its effects. In response, Obama further cut income taxes for families by $800 and individuals by $400.

Tax Reforms Under Donald J. Trump

 

Much of President Bush’s government was characterized by tax relief measures, often known as the “Bush Tax Cuts”. Put simply, the tax reforms made major changes to the tax code, lowering federal income tax rates, providing relief to married people, increasing the child tax credit, and lowering the tax rate on dividend income and capital gains taxes.

The Bush Tax Cuts eliminated taxes for many items, such as itemized deductions, exempted rates for higher-income individuals, and lowering the maximum estate tax.[1] President George W Bush’s main priority was to boost the economy during the recession that followed after the collapse of the dotcom bubble and 9/11. There were major repercussions for all parties involved with trillions in losses. 

It's Impact On The Job Market

 

Since the adoption of the 2017 Tax Cuts and Jobs Act, (TCJA) unemployment rates have hit historic lows. When President Trump took office the Unemployment Rate stood at 4.6 percent. Today, the overall unemployment rate stands at 3.3 percent. The rate today has not been this low since 1968, which stood at 3.5 percent.[1]

And while today, these unemployment figures are probably going to rise as a result of the Coronavirus pandemic, there is clearly a relationship between the 2017 tax cuts and the economic expansion over the past 2 years. While Trump promoted that his policies would generate Gross Domestic Product growth of 3 to 4 percent per year, the average of 2.5 percent since 2017, has been the most consistent growth in the past 20 years

 Solutions 

 

In the two years since the Tax Cut and Jobs Act of 2017, the U.S. economy has remained strong, and producing record low unemployment rates among all groups of people in the country. This type of economic growth is what is required to keep this country strong, and future tax policy must be focused on growth. The TCJA provided corporate tax payers with permanent tax relief, but individual tax payer relief is planned to sunset after 2025. The impact is about $1,000 in increased taxes per individual. Some will look at long term budget projections and include this revenue increase. That should not be an option. The individual tax cuts of TCJA, need to be made permanent.

Pro-Growth Tax Policy

1. Congress needs to extend the individual tax rates of the TCJA permanently beyond 2025. This permanent tax cut not only serves individuals but LLCs and S Corporations. Businesses must have a stable tax structure in order to grow the economy. Extending these tax rates are key to providing that stable environment.

2. Support the Heritage Foundation Pro-growth tax policies contained in their 2020 Blueprint for Balance.

a. Universal Savings Accounts – Similar to retirement instruments like 401ks accounts, A USA is not bound by all the requirements of what it may be used for, withdraw penalties or age restrictions for use. USAs could be used for education, retirement, housing, even medical care.

b. Reduce spending in the Tax Code – The tax code each year picks winners and losers while distorting market outcomes. Tax Credits are ways to spend through the tax code, and their impact is indistinguishable from direct spending. A tax credit is an off-budget expenditure that is not subject to review as a reliable and effective use of government spending. If congress seeks to provide subsidies to a particular program, direct refunds to purchasers make a far better means of distribution and evaluation of tax dollars.

c. Tax Credits – are poorly designed incentives, that poorly target the desired activity. Tax credits are also subject to manipulation based on political agendas and disrupt private-sector investment.

d. The Blueprint for Balance list twenty-nine separate tax credits that should be ended.

e. https://www.heritage.org/blueprint-balance/policy-agenda/pro-growth-tax-reform

Specific tax credits that should be repealed include, the specifics of why the following credits need to be repeals are listed in the document listed above.

i. Tax Credits for Higher Education and American Opportunity Tax Credit

ii. Research and Development Tax Credits

iii. Energy and the Environment

iv. Bio-fuel Tax Credit 

 

*This paper was developed on 3/24/2020 and will be revised and adjusted as more relevant information is presented.

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