How the Trump tax plan works
During Donald Trump’s tax reform speech yesterday at the Detroit Economic Club, he spoke about simplifying the tax code, which will be welcomed by tax payers, deductions for child care, and lowering the corporate tax rate from 35% to 15%. It is this last item that piqued my interest. Of the 34 industrialized nations of the Organisation for Economic Co-operation and Development (OECD) the United States currently has the highest corporate tax rate, which represents the principal reason why American companies have been moving their operations overseas.
According to the OECD, most of the world has been lowering the corporate tax rate over the last fifteen years, thereby stimulating their economies. To illustrate consider these countries:
COUNTRY 2001 2016
Canada 40.5% 15.0%
Germany 38.9% 15.83%
Japan 40.9% 23.40%
UK 30.0% 20.0%
USA 39.3% 35.0%
Now you know why American companies are moving to our neighbors in the north. Canada’s reduction has allowed them to escape recession and resulted in boom times for the country. It is no coincidence Canada’s drop in unemployment parallels a decline in the corporate tax rates for the same period. Likewise, German manufacturing has grown and surpassed the United States as the #2 exporter in the world (behind China at #1). So, there is strong evidence Trump’s plan to reduce the corporate income tax will result in more jobs and greater output.
When it comes to American government, there are three ways to make and save money. First, raise taxes on the citizens and companies, which has been the Democratic mindset for a long time. Such an approach tends to accelerate government bureaucracy and causes people to close their doors and move away. Second, curb spending, which has only risen under Democratic rule. Third, reduce taxes and regulations thereby encouraging companies to stay and prosper.
As Ronald Reagan said, “Common sense told us that when you put a big tax on something, the people will produce less of it. So we cut the people’s tax rates, and the people produced more than ever before.”
So, to buy into Trump’s plan, you have to believe in the power of capitalism, not socialism. Under capitalism, you cut taxes and reform regulations, both of which Trump proposed yesterday. By doing so, you are unleashing business. For socialism, you raise taxes and create a stifling government bureaucracy to control all aspects of life.
According to a recent Heritage Foundation study, “Regulation acts as a stealth tax on the American people and the U.S. economy. The weight of this tax is crushing, with independent estimates of total regulatory costs exceeding $2 trillion annually-more than is collected in income taxes each year.”
Heritage also points out the Obama administration has introduced over 20,600 rules and regulations since 2009. Why so many rules? One cannot help but wonder if it is to protect consumers or to justify the existence of government. Frankly, I think it is a prime example of “Parkinson’s Law” whereby “work expands so as to fill the time available for its completion,” hence the need for government bureaucracy.
Trump’s tax proposals, particularly the reduction of regulations and the corporate income tax, will be welcome news for small businesses as well as large. It will put more people to work, unleash American output, thereby fueling the Gross Domestic Product (GDP), and generating more money for our economy.
It just makes dollars and cents.
Keep the Faith!