Republican parents often tell their children that while their friends may think they are Democrats when they’re young, just wait until they have to start paying taxes. Once you see significant portions of your paycheck disappear into the abyss of bureaucracy and waste, you begin to vote for the party fighting for lower taxes.
The GOP tax reform was long-anticipated and it contains tons of great policy that is pro-growth and pro-worker. The plan does many things but primarily works to simplify the tax code, lower rates for individuals and lower the corporate rate. Bear in mind that tax reform itself is complex and I tried to simplify many of the intricacies.
The current tax code burdens too many Americans with overly complex rates and deductions. The new proposal will simplify the current seven rates down to four and nearly doubles the standard deduction. Doubling the standard deduction will alleviate the encumbrance of itemizing for approximately 22 million Americans.
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With the new tax rates of 12, 25, 35 and 39.6, most Americans will see a tax cut, especially the lower and middle class. According to the Tax Foundation, those with incomes up to the 80th percentile will see after-tax income increases between .8 to 2.4 percent. That’s real money in the pockets of hard-working Americans. Little is given to the top 1 percent who pay nearly half of all tax revenue. Nearly half!
Lastly, the reform will lower the corporate tax rate and the rate on pass-through entities. The corporate rate, currently the highest in the developed world at 35 percent (39.1 percent when state taxes are factored in), will be lowered to 20 percent, below the OECD average of 25 percent.
Our friends across the aisle will certainly give the same line that we’ve heard from the left forever, that corporate taxes are a tax cut for the rich. That’s simply not true.
Let’s first and foremost not forget that the corporate tax is a double tax. The business collects income and it’s taxed, and then that income is either invested, paid in the form of wages or is passed to the shareholder who took the risk. The income and capital gains taxes tax that money a second time. The government is double dipping.
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Second, workers benefit the most from an increase in wages. Adam Michel of the right-leaning Heritage Foundation did a great literature review of all the studies done on tax incidence (the amount of the corporate tax that falls either on capital or labor in the form of wages) and came to find that the vast amount of research shows that workers bear the burden of the corporate tax.
Theoretical research concludes that when an economy is open (like today’s free-trade environment) businesses will move elsewhere or pass off the cost of an increase in taxes to their labor, not their shareholders.
Most empirical studies estimated that labor bears 75 to 100 percent of the corporate tax. One study even proved that a $1 increase in the corporate tax leads to lost wages of $4-5. Tax reform is ultimately even better for the worker than it is for the corporation and the rich. A Boston University study estimated that the effect of this specific plan will increase wages four to seven percent, previously stagnant under President Obama.
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Tax reform will catapult the American economy. The Boston University model points toward the sustained growth of 3 to 5 percent, at a time when economists were fearing low growth was the new normal.
The Democrats will ultimately point the finger and say we’re blowing the deficit. I say let’s cut spending in equal amount. I’m guessing they won’t like that answer.
Get ready for a new period of economic boom as wages, growth and employment soar. College Republicans can’t wait for tax reform to revitalize the greatest economy in the world!
Jake Luebenow ([email protected]) is a senior majoring in finance, investment and banking and political science.
