Trump’s Tax Plan Would Spur Growth

via Edward P. Lazear / Wall Street Journal

President Trump’s tax plan leaves many details undefined, but there is plenty to evaluate. The administration claims its proposed changes would encourage growth and make the tax system more efficient. History suggests they will.

Less certain is the claim that the tax cuts will pay for themselves. Although budget concerns should always be paramount when cutting taxes, revenue neutrality does little to guarantee that this—or any—administration will exercise fiscal responsibility.

Most economists favor moving away from taxing capital and toward taxing consumption through value-added or sales taxes. Taxing capital squelches growth because capital is mobile and can cross borders in search of the highest risk-adjusted, after-tax return. Economists in both parties have scored the effects of eliminating capital taxation in favor of a pure consumption tax. Estimates range from a 5% to 9% total increase in gross domestic product.

There are a number of ways to move toward a consumption tax and reduce taxes on capital without instituting a national sales tax or VAT. One is to lower tax rates on corporate profits and “pass-through” income, as the president proposes. Another is to permit full expensing—to let companies deduct the entire cost of investments immediately.

Expensing creates a positive incentive for corporations because they receive the tax benefit only when they invest in themselves. A Treasury Department analysis done while I was chairman of the Council of Economic Advisers showed that a given dollar of tax cuts through expensing is more powerful than rate cuts in the short run by about a factor of four.

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President Donald Trump spoke at the National Day of Prayer ceremony, in the Rose Garden of the White House, On Thursday, May 4, 2017. (Photo by Cheriss May/NurPhoto via Getty Images)

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