Mere Permanency In the Tax Code Will Encourage Economic Growth

According to a new Tax Foundation report, permanently locking in lower individual and corporate tax cuts is the most important pro-growth feature of the recently enacted tax bill. While preventing a $4.5 trillion tax increase is important, and while other targeted tax cuts are getting all the attention, permanence is much more significant, providing increased stability to the tax code after years of uncertainty.

The report details how the permanent provisions will give taxpayers the certainty needed to increase long term investments. Combining the permanent 21% corporate tax rate with the permanent full expensing should provide a boost to capital investment in the U.S., leading to increased productivity, wages, and growth.

Permanence also reduces the threat of higher tax rates that have been hanging over investors and businesses the last few years. Every year from 2021 to 2024, the Biden administration proposed a lengthy list of tax increases totaling trillions of dollars. Congressional Democrats pushed these tax increases as well, most recently during this year’s tax debate. This constant threat of higher taxes will be reduced with the tax debate over the 2017 tax cuts settled.

American businesses have been under the threat of the most economically harmful tax increase, raising the U.S. corporate tax rate to 28%, for a combined rate of 32.4%, one of the highest rates in the world, far higher than China’s top tax rate and every corporate tax rate in Europe. Any increase in the corporate tax rate would decrease investment, wages, and growth, and threaten American competitiveness around the world.

Other economically damaging tax increases pushed the last four years include higher personal tax rates on savers and investors, nearly doubling the top capital gains rate, and imposing an annual 25% tax on unrealized capital gains, a tax no other country in the world imposes. All of these proposals are punitive tax increases aimed at entrepreneurs and wealth creators. With the threat of these tax increases reduced, investors and businesses should feel more confident making the long term investments needed to grow our economy.

One remaining impediment to investor certainty is the uncertainty caused by the ongoing trade negotiations and tariffs. In recent corporate earnings calls, companies have cited the improved outlook due to the passage of the tax bill, while also raising concerns about the tariffs. From their point of view, the positive effects of the tax bill would be greatly enhanced if the tariff uncertainties could be resolved once and for all.

Much lower tax rates for every taxpayer and every American business would unleash much more investment and growth. But that is a debate for another day. For now, making these tax cuts permanent for the first time will encourage more investment and help boost economic growth.