Tax reform needed to sustain economic growth

Raymond Keating
Raymond Keating

The Bureau of Economic Analysis increased its estimate for third quarter real growth in gross domestic product from 3 percent to 3.3 percent. The increase brought the third quarter growth rate up to the historical average. GDP growth has now exceeded 3 percent the last two quarters.

Amidst the revisions, it was good to see real growth in business investment revised up from  3.9 percent to 4.7 percent, including equipment investment growth going from 8.6 percent to 10.4 percent and intellectual property products investment increasing from 4.3 percent to 5.8 percent. Private investment remains critical to growth now and into the future.

The timing of this latest GDP growth estimate provides an important lesson as Congress undertakes major tax changes. Among the driving reasons for tax relief is faster economic growth, which in turn means improved income and employment growth.

Keep in mind that during the current recovery and expansion period, real annual GDP growth has averaged only 2.2 percent — about half the rate of growth we should experience during growth periods based on historical norms.

For good measure, prior to these past two quarters, the U.S. experienced two previous two-quarter periods of 3 percent-plus  growth since mid-2009. The problem throughout this underperforming recovery and expansion period has been sustainability.

We now have reason to be optimistic for more sustainable growth. For example, the aggressive regulatory activism of the Obama era has been halted. More is needed, of course, such as broad, permanent regulatory relief and institutional reforms. But stopping and starting to roll back regulatory overreach matters. And President Donald Trump’s agenda and actions have made a powerful difference in this regard.

The current tax relief effort must become policy reality. For example, among the key steps forward, business and individual tax rates must be reduced, the so-called death tax killed and expensing of capital expenditures made available for all businesses.

For good measure, assorted measures that have crept into the current debate must be jettisoned. For example, all tax relief measures need to be permanent. Temporary tax changes have more limited, and obviously temporary, positive effects on the economy.

Along similar lines, triggers for tax increases must be avoided at all costs.
The notion taxes should be increased if future government revenue projections fail to materialize is a kind of self-fulfilling prophesy, as such uncertainty would restrain entrepreneurship and investment.

As Karen Kerrigan, president and chief executive officer of the Small Business & Entrepreneurship Council, noted: “A trigger takes the growth out of pro-growth tax reform. Entrepreneurs want predictability along with reforms that promote investment and sustainable economic growth. The threat of a trigger will harm investment in small businesses and startups and reboot the uncertain economic and policy environment that we are working furiously to get out of.
A trigger undermines many of the reasons for doing tax reform in the first place, which is to make our tax system more competitive and spur strong investment and economic growth.”

Finally, such misguided ideas as temporary tax relief measures and tax increase triggers violate a fundamental principle that must guide all tax relief efforts, as put forth recently by U.S. Sen. Rand Paul, a Republican from Kentucky: “Our default position should be that the money you earn belongs to you, and government has to justify why it should take it from you.”

That’s a sound principle from a freedom perspective and economic growth perspective.