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October 17 2017

Business Tax Cuts Will Help the Middle Class

by Charlotte Hays

Commerce Secretary Wilber Ross and "Kudlow Report" host Larry Kudlow agreed last week in a one-on-one at an event at Google headquarters sponsored by Newsmax and Google that to sell the proposed tax cuts in the GOP tax plan, the president has to make the link between tax cuts for business and opportunities and prosperity for middle income people.

Edward Lazear, former chairman of the President's Council of Economic Advisers (2006-2009), Stanford Business School professor, and fellow at the Hoover Institution, makes a similar observation in today's Wall Street Journal. Lazear writes:

For the plan to pass Congress, its backers must provide affirmative answers to two key questions: Will it boost the economy enough to cover most of the revenue cost? And will it help the middle class? The answer to both questions is yes, although some key changes can make achieving these goals likelier.

Lazaer outlines how the plan could have significant economic advantages for the middle class:

The Big Six plan includes direct tax cuts for middle-class earners, but the reduction in business taxation has been criticized as benefiting the wealthy. In the short run that is likely accurate, but as time progresses a major fraction of those benefits will accrue to the middle class, for two reasons.

First, corporate rate cuts attract more foreign capital and domestic investment, which increases demand for labor, and hence wages. Second, the growth effects are primarily associated with increased productivity, as opposed to more hours of work. Productivity means greater output per worker, which produces higher average wages. I estimate this would amount to between $1,800 and $2,400 annually per household once the full growth effects are realized. A substantial share of this increase would be enjoyed by middle-class households.

The Big Six are the White House and Hill officials who are putting together the tax reform package (the group includes Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, House Ways and Means Chairman Kevin Brady, House Speaker Paul Ryan, Senate Finance Chairman Orrin Hatch and Senate Majority Leader Mitch McConnell).

What is the tweak Lazear would make to the Big Six plan? Full expensing of capital investment in the Big Six plan is temporary. Lazear says make it permanent:

Experts disagree on how much growth tax cuts will produce, but there is general agreement that permanent expensing would produce more-sustained growth. It would also imply an additional reduction in tax revenue.

Lazear proposes that the revenue reduction could be offset by "a more targeted approach to reducing the taxes paid by small and midsize businesses."

Let's hope the GOP can get over the Democrats' predictable smear that the GOP plan is "welfare for the rich" and help the middle class have more opportunity and prosperity, which is so much more practical  than empty class warfare rhetoric.

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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