Why Do Conservatives Support the Republican Tax Plan?

In recent years, the Republican tax plan has garnered significant support from a group of prominent conservative economists, who argue that it will enhance economic growth and align American corporate tax rates with those of the developed world. This article delves into the rationale behind this support, drawing from an insightful NPR episode and a letter to the Treasury Secretary from leading economists.

Conservative Economists Advocate for Growth

Conservative economists champion the Republican tax bill as a means to stimulate economic growth. They argue that bringing American corporate tax rates in line with global standards will encourage American businesses to expand within the United States. This perspective is backed by a letter to Treasury Secretary Steven Mnuchin, signed by prominent economists from prestigious institutions such as Harvard, Stanford, Columbia, and the Hoover Institution.

The letter emphasizes that fundamental tax reform seeks to reduce distortions on productive activities, such as business investments and work, and broaden the tax base to minimize disparities in tax treatment among similar entities. The proposed reforms are part of this long-standing tradition of fundamental tax reform, including the Tax Reform Act of 1986 and the "Growth and Investment Plan" from President George W. Bush’s advisory panel.

Reducing Corporate Tax Rates to Stimulate Investment

According to the economists, reducing corporate tax rates is essential for boosting economic activity. A key concept in this context is the "user cost of capital," which measures the expected cost to firms of making additional investments in equipment. Economic research suggests that lowering this cost can increase both short-term and long-term economic output.

Several provisions in the House and Senate tax plans, such as expensing and moving to immediate depreciation of equipment and intangible investments, significantly lower the user cost of capital. This would induce more investment by U.S. businesses and make it more attractive for both domestic and foreign multinational corporations to invest in the United States. Studies have shown that a 10% reduction in the cost of capital could lead to a 10% increase in investment.

The letter posits that reducing the corporate tax rate to 20% and implementing full expensing of equipment and intangible investments within five years would lower the user cost of capital by an average of 15%, potentially increasing the demand for capital by the same amount. Using a conventional economic model, this could result in a long-run increase in GDP of around 4%, or 0.4% annually over a decade. However, if full expensing is only temporary, the long-run GDP increase would be slightly lower.

Individual Tax Rate Reductions and Economic Efficiency

The letter also advocates for reducing individual tax rates, which economists believe would generally offer positive economic effects. By reducing the taxation of non-corporate business income and increasing the capital expensing allowed, the proposed individual tax provisions would further boost investment and GDP. Moreover, reducing marginal tax rates on labor income for most taxpayers would increase the incentive to work, leading to higher taxable income and revenues.

While base-broadening features, such as limits on the federal tax deductibility of state and local income taxes, could result in some taxpayers facing higher effective marginal tax rates, the overall effect would enhance economic efficiency by confronting most households with lower marginal rates. This would also address fairness concerns by reducing differences in tax treatment among individuals with similar incomes and simplify the tax code by reducing itemization.

Conclusion

Leading economists and conservative thinkers collectively vehemently support the Republican tax plan due to its potential to stimulate economic growth. By aligning corporate tax rates with global peers and reducing the user cost of capital, the bill would encourage more business investments, benefiting not just U.S. corporations but also multinational entities. Additionally, lowering individual tax rates would further enhance economic activity and significantly broaden the tax base.