The GOP Must Stop Negotiating With Itself on Taxes, and Go Bold

Now the Republicans are talking about raising tax rates in what is supposed to be a tax cut bill. While raising tax rates on the rich might be appealing to the government is never big enough crowd, it won't boost economic growth. Raising tax rates hasn't worked in the past and won't work this time. Higher marginal rates are a drag on economic growth, they punish risk-taking, and divert a larger relative portion of the economy to government control at the direct expense of productive investment. It was the rate increases and the regulatory onslaught of the previous administration that combined to produce the slowest post-war economic recovery on the books. And yet there is still talk of raising tax rates.

It's disheartening that even some Republicans have adopted the demand side talking points of putting more money in the hands of the middle class to grow the economy. That is not how it works. Reducing the tax burden on the middle class by increasing the standard deduction enables them to take home more of their earnings for a given amount of work. It makes their life easier and I'm all for that, but in truth, you need only increase exemptions and deductions to counter-act tax rates that are still too high. If you want to provide an incentive for people to produce more, the very definition of economic growth, cut their marginal tax rates. If you want to incentivize the people who can have the greatest impact you cut the top marginal tax rate. Realigning incentives for risk-taking and investment is what makes an economy grow, and that's whats been missing in America.

There are some in Washington who want the top personal tax rate to stay at 39.6%, and others who want to add yet another higher tax bracket. That's not a tax cut. Dropping the top personal income tax bracket to 35% would only cut the rate by 11.5%. A piddling amount in contrast to the much bolder proposed 42% reduction of the corporate rate. Corporations don't pay taxes, people pay taxes. If you ratchet down the corporate tax rate and backstop it with a 39.6% or higher personal tax rate, you blunt the pro-growth impact of the corporate rate cut. It is those people in the top tax bracket who provide and direct the investment capital that powers business growth. To limit or decrease the incentives for those with the greatest potential to increase economic growth is benching your star economic players. Why not instead lower the rates and make it easier for people to become rich?

You don't realize a bigger economy and greater prosperity through higher tax rates, and bigger government. This type of thinking is demonstrably false. Those who think that higher rates equal greater tax revenue need only look at a chart that depicts federal taxes as a percent of GDP to realize that tax payments are remarkably stable at around 18% of GDP despite the tax rate. This was true in the 50's when the top rate was 90% and also true in the late 80's when the top rate was 28%. The key to prosperity has always been robust economic growth. The faster the economy grows the greater are the revenues generated at any tax rate. The economic booms of the 1920s, 60's and 80's all began with reductions in the top marginal income tax rate that incentivize the risk takers of the investor and entrepreneurial classes. The very unremarkable expansion in the 90's during Clinton's first term was turned into a boom by a 40% reduction in the capital gains tax rate in 1997. All else equal, rate cuts increase economic growth just as rate increases retard economic growth.

If you've ever watched a professional poker player you'll see that a bigger chip stack and more aggressive betting ( risk taking) go hand in hand. Players with short stacks are often bluffed off a winning hand by an opponent with an inferior hand who has more chips. Its economics, and the more of something that you have - whether that's dollars or chips - the smaller the impact of the loss of a single unit is. The same is true in investing, those investors with the most capital to invest can afford to take greater risks. When you reduce their chip stack by increasing their tax rate they make fewer and more conservative investments. If you want the economy to grow at its full potential you need investors to be confident enough to make not only the safe bets, but to fund the riskier investments as well. The Republicans who will end up supplying all the votes to pass the tax bill should stop negotiating with themselves, and go all in on a substantial cut to the top marginal rate.