When the American economy is stuck in a rut, how do we get it moving again?
We know the route to recovery: Cutting tax rates, closing loopholes, and broadening the base to encourage working and saving, building businesses and creating jobs.
I’ve seen such strategy work before, and I know we can do it again. In 1980, I served as an economic adviser to presidential candidate Ronald Reagan. With the unemployment rate above 7 percent and inflation rates well into double-digits, Reagan proposed tax rate cuts to boost the incentives for production, output and employment.
The results: A landslide for Reagan who had been dismissed by Democratic Party stalwart Clark Clifford as an “amiable dunce.” After Reagan’s economic reforms took effect, economic growth soared.
Growth was so great that Reagan’s economic policies won bipartisan support. After the initial cuts in 1981, his tax reforms received support from many leading Democrats, including Sen. Bill Bradley of New Jersey and Rep. Richard Gephardt of Missouri.
Even before President Reagan, we saw tax rate cuts prove their prowess. Just as Reagan ignited the economic boom of the 1980s, President Kennedy’s tax rate cuts produced the economic growth of the 1960s that was so robust we refer to the era as the “Go-Go 60s.”
Fast-forward to today. The economy is mired in the slowest recovery since the Great Depression. Our tax policy, that has proved to be so tragic, reserves special favors for special interests and targets punitive taxes at their competitors.
Revving the economy up once again to the booms of the 60s and 80s requires smart policies, not narrow partisanship.
As Americans debate tax issues, the stakes couldn’t be higher, and the choices couldn’t be clearer. After cutting the corporate tax rate from 46 percent to 34 percent in 1986, the United States had about the lowest corporate income tax rate in the Organization for Economic Cooperation and Development (OECD). In fact, our success with the corporate tax rate cut inspired our competitors to cut their corporate tax rates, too. Eventually, the average corporate tax rate in the OECD was lowered far below the rate in the U.S.
However, today, contrary to where we started 30 years ago, the U.S. has the highest corporate tax rate in the OECD. But, because companies — just like people — go to great lengths to reduce their tax burdens, the U.S. also has some of the lowest corporate tax revenue collected as a share of gross domestic product of any OECD country. That is why it is so important for the U.S. to have one of the world’s lowest corporate tax rates again, so that companies will focus on creating products and providing services rather than specializing in gaming global tax codes.
As America cuts corporate taxes, we also need to avoid special interest provisions that reward some sectors and punish others, often under the guise of supporting American companies against their competitors.
Here’s a prime example of the protectionism that distorts the tax code and derails economic growth:
As in previous years, President Obama is supporting a proposal by Sen. Robert Menendez (D-NJ) and Rep. Richard Neal (D-MA) to defer or deny U.S.-based, foreign-owned insurance companies the standard business cost deduction for a basic expense.
Insurance companies buy backup coverage — or “reinsurance” — to spread the risk for potential major losses, such as earthquakes, hurricanes or airplane crashes. By US insurers purchasing this reinsurance from foreign affiliates, insurance companies can pool the risk of hurricanes in Florida and earthquakes in California with natural disaster risk from Europe and Asia. They diversify their portfolio while matching risk with their capital.
Revealing its protectionist purposes, the Menendez-Neal proposal would deny or defer the deduction for buying reinsurance from overseas affiliates to foreign-owned, but not US-owned, companies. This is a textbook case of bad tax policy: Creating a high tax rate on a narrow tax base, instead of a low rate on a broad base. It would also leave American insurance companies vulnerable to protectionist retaliation in other countries.
Worse yet, this punitive measure ignores the basic economic principle that, when government imposes a punitive tax on a product, consumers get less of it and pay more for it. In a study of a previous version of the proposed legislation, the economic consulting firm Brattle Group estimated that the supply of primary insurance in the U.S. would decline by between $11.2 billion and $11.7 billion as a result of this special surcharge. Meanwhile, American businesses and individuals would have to pay between $11 billion and $13 billion more for insurance coverage.
Because insurance is so essential to the economy, the nation would lose an estimated $4.07 in gross domestic product for every $1 that the federal government would gain in additional tax revenues from this proposal, according to an expert Tax Foundation analysis.
This trend from the Menendez-Neal proposal follows the detrimental trend of other protectionist economic policies, creating an environment that discourages foreign direct investment, competition and hinders economic growth.
In a free-market economy, taxes should fund the government without being so complex that they pick winners and losers, so steep that they discourage work and investment or so uncompetitive that they compel companies to move their tax domiciles overseas.
Instead of punitive taxes on politically targeted companies, America needs uniform, unbiased and understandable principles for defining the corporate tax base. Moreover, we need to make the tax code internationally competitive, with lower marginal tax rates. Now, as in the past, that is the proven way to build businesses, generate jobs and increase incomes.
We know the roadmap. Now, let’s get America moving again.