Economic growth: the great missing element of our time. Throughout American history, it has reliably been epic. The only times it wasn’t—say in the Great Depression of the 1930s—the bad times eventually gave way to the same old stuff, growth at a high rate, sustained for decades.
Except for these seventeen years of the new millennium. In the 2000s, growth has poked along at under 2% per year. 2006-16 marks the only time we have had eleven straight years of sub-3% growth. This is badly abnormal. To coin a phrase, let’s make America great again—and have this country’s economy grow as it always has, as is its nature.
Earth to Thomas Piketty: High tax rates cause inequality (THIERRY ROGE/AFP/Getty Images)
The tax reform outline the Donald Trump administration released at the end of April is the necessary condition for the restoration of American prosperity. This tax reform is the shock that can, substantially, revert the economy back to its historic trend. Stable money is important too, but the Federal Reserve appears to be acting like a currency board, holding the dollar against the market price of gold these years under Janet Yellen. Since 2014, we have been on a de facto gold standard, though lacking the benefit of fixed exchange rates (as a number of us discussed at the Jack Kemp forum last month). As for regulation, it has to be hacked down. For now, we can reform the tax code.
The big item in the Trump proposal is the cut in the corporate tax rate, reduced from 35% to 15% and expanding its definition to include small businesses. Such a cut would undermine the value of exemptions from and avoidance of the current corporate rate, things that constitute big-company strategy in this slow-growth era. Such a cut would refocus American business on making things and selling them—the stuff of real growth.
The rest of the plan, the trimming of the top personal income-tax rate, the reduction in the number of personal-rate brackets, and the cashiering of the estate tax and the alternative minimum tax, will have similar effects. These reforms will prompt Americans to pay less attention to the tax consequences of what they are doing and be themselves. And when Americans act naturally, booming growth and mass affluence is the result.
The carping over the Trump proposal has concerned two things, rich people and the federal budget deficit. The funny thing is that rich people actually thrive under high tax-rate systems. The wealthy and well-connected profit, relatively, from high rates on high income. Members of the elite hire experts to write into law exemptions that free them from punishing rates, while leaving these rates to apply to the competition, namely those who are striving and aspiring. High tax rates are a competitive advantage to the settled rich.
Larry Kudlow and I, in our recent book JFK and the Reagan Revolution: A Secret History of American Prosperity, detailed the ways that the already rich made out under marginal tax rates that soared all the way to 91% before John F. Kennedy cut them in the 1960s. Some examples:
- Studio mogul Louis B. Mayer got a pet statute written into law applicable only to him, in the 1950s, that made his $2.7 million lump-sum payout subject to special tax rates two-thirds lower than the regular rates.
- Lawyers regularly recommended their richest clients not to challenge IRS audits, but to get Congress to write a statute line, of the Mayer variety, to benefit their kind of income specifically—it was that easy to gain an exemption from high tax rates, if you had the pull.
- The income-tax code stipulated that taxable income was “income from any and all sources derived,” yet only 43 percent of income was taxed, on account of the exemptions. Labor unions called the tax worksheets corporations and the settled rich used to legally avoid high tax rates the “swindle sheet.”
All of this only makes sense under a regime of high tax rates. Indeed, high tax rates have served one central purpose throughout history: to confer value to exemptions.