The Republican tax rewrite that has now passed both House and Senate represents a legislative triumph for one core idea: that lighter tax burdens mean more economic growth.
Right now, it’s not just the sales pitch behind the tax plans, it’s arguably the idea that most unites a Republican Party challenged by internal divisions and electoral uncertainty.
“If we can’t do better than 1.9 percent [growth], we’ve got real problems in this country,” Sen. Rob Portman (R) of Ohio said last week, citing the current growth rate projected for the next decade by the nonpartisan Congressional Budget Office.
But now comes the test: Will the theory turn into economic reality? Will the virtue of tax cuts ring true for the voters who will decide coming elections?
Many economists say the House and Senate plans – which now must be reconciled into a final bill – may serve more as a giveaway to the rich than an enhancer of growth.
At the same time, wage growth and gross domestic product have disappointed in recent years. During seven years of recovery since the Great Recession, not once has GDP notched a calendar-year gain of 3 percent or higher. It’s not just economists on the political right who see a connection between growth and the health of America’s social fabric. Many finance experts say lower corporate tax rates could boost long-term growth, at least modestly.
“The corporate rate cut by itself certainly should be a pro-growth provision,” says Alan Viard, a resident scholar at the conservative-leaning American Enterprise Institute (AEI) and former senior economist at the Federal Reserve Bank of Dallas. “Telling companies both American and foreign-chartered that they can keep 80 percent of their profits operating in the US instead of 65 percent should make the United States a more attractive investment location. So you should see capital flow to the United States, which would make American workers more productive and would drive up their wages.”
The GOP bills would cut the top tax rate on corporations from 35 percent of income to 20 percent, while also reshaping the individual side of the tax code.
The idea of reducing nominal tax rates on corporations has had fans on the left, such as former-President Barack Obama, as well as on the right. The centrist Information Technology and Innovation Foundation is among those seeing a potentially sizable long-term boost in GDP from…