Trump can unleash a massive economic boom

But he and Congress must implement the correct policies within the next 15 months

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This article is part of an extended series of articles giving policy reform advice to the Trump administration from the Progress-based perspective. If you have not yet done so, I would suggest:

1. First reading Priorities for the second Trump administration to understand the constraints that President Trump must operate within, and

2. Then reading the rest of the series from the “Table of Contents”.

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Many conservatives are celebrating their victory in the 2024 federal elections and the first few weeks of the second Trump administration. I have one message for them:

Donald Trump and the Republican party have been given one of their best opportunities to reshape federal policies in the last 90 years, but it is only an opportunity. Both parties have wasted seemingly transformative federal trifectas and achieved little fundamental policy reforms (including the Clinton, GW Bush, Obama, and the first Trump administrations). And given political history, the Republicans have a mere 15 months to implement their agenda, so ruthless prioritization is critical.

Presidents do not control the economy

The American people will largely judge President Trump and the Republican party by the state of the economy. In some ways, this is unfair as the President (thankfully) does not control the economy.

The US economy is the unintended outcome of the decisions of 347 million people and thousands of companies. And the other 8 billion non-Americans have an important effect as well. No one controls the US economy. That is why it works. If any single person controlled it, the US economy would not work anywhere near as well.

Like all modern economies, the US economy has a semi-regular cycle of booms and busts that have little to do with Presidential policy. During most years, there is economic growth of roughly 2-4%, and every 5-10 years, we experience a recession with negative growth. The exact timing and scope of the booms and busts vary, but the general cycle does not.

Presidents get the credit for booms that they did not create, and they get the blame for economic recessions that they did not create. That is politics.

But policy matters for long-term economic growth

I do believe, however, that the President and Congress can lay the policy foundations of long-term economic growth. I believe that long-term economic growth should be the key goal of government as prosperity makes it far easier for the rest of society to work to solve almost all the other problems.

I believe that a few key policy domains are central to unleashing long-term economic growth:

1. Energy (which is closely related to the Fifth Key to Progress: widespread use of fossil fuels).
   As my regular readers know, I believe the Five Keys to Progress are the fundamental preconditions for long-term material progress. So obviously, government reforms to create long-term economic growth should focus on those domains.

2. Regulation (which is closely related to the Third Key to Progress: Decentralized political, economic, religious, and ideological power).

3. Corporate income taxes.

In other articles, I explain my proposed policy reforms for Energy and Regulation. In this article, I will explain my proposed policy reform for corporate income taxes. But first, let me explain why corporate income taxes are so important to get correct.

I am a political independent. I do not have a positive view of either the Democratic party or the Republican party. The same goes for virtually every political party of either the Left or the Right in the entire world.

My primary complaint with the Right is that:

1. They complain about the Left being wrong and then do nothing about it once they are elected. While in power, Republicans parties on the Right throughout the Western world have acted like caretakers of stasis. In other words, they do nothing. I am impressed by Results, not Talk.

2. Republicans and parties on the Right throughout the Western world almost never fundamentally reform existing policy and rarely even make concrete proposals for how to do so.

3. The one policy reform that Republicans consistently deliver on: cutting marginal rates on federal personal income taxes is irresponsible during times of massive federal deficit and debt. And as a general rule, I strongly believe in both progressive tax rates and a balanced budget.

Republicans claim that cutting federal personal income taxes unleash long-term economic growth, but I am very skeptical of that claim. Just like economic stimulus packages, income tax cuts stimulate the short-term economy, but they have to be paid for in the future via interest payments on the national debt (which undermines long-term economic growth).

So the tax cuts help short-term economic growth while undermining long-term economic growth (the opposite of what we should be doing).

I do not believe that the marginal rate for personal income tax rates has an important long-term effect on economic growth. Obviously, very high marginal rates (say, over 50%) can seriously undermine economic growth, but I don’t think that the US is very close to that except where Blue states add on relatively high state income tax rates.

So should Trump cut the marginal rate for personal income tax rates?

No!

It may be politically popular among Republicans, but it is irresponsible policy at a time of massive federal deficits and debt.

What should Trump do?

Now that does not mean that the Trump administration should ignore taxes. I believe that a far more effective means to stimulate long-term economic growth while minimizing the loss of federal revenues is to:

• Completely overhaul federal corporate income taxes so that they encourage domestic investment, and

• Drastically lower federal corporate income tax rates to 10%.

And, yes, this is instead of cutting the marginal rate for personal income tax rates.

Before going on to explain my proposed reforms, I want to acknowledge that I know far less about the intricacies of federal corporate income taxes than I do about other policy domains. I can only sketch out my proposed reforms in broad strokes. But I am nonetheless convinced that it needs serious reform.

Corporate income taxes are a farce

Corporate income taxes are a farce perpetrated by both political parties that:

• Create the illusion of taxing the rich and powerful, while

• Seriously undermining corporate investment that is essential for long-term economic growth.

The reality is that corporations do not pay taxes! Corporations are legal entities that merely pass the cost of federal corporate income taxes to some blend of:

• Customers (via higher prices)

• Employees (via lower compensation packages)

• Stock owners (via lower returns in the stock market)

Now economists have huge disagreements as to the relative proportion that is paid by each of the groups, but I do not think that the fact that pass-through occurs is controversial. My guess is that which of the three groups pays varies greatly by economic context (i.e. corporations will pass on the taxes to the group that it best thinks it can get away with the least negative consequences.

So the rallying cry that “Big corporations should pay their fair share of taxes!’ is a crock.

Big corporations will never really pay a penny in taxes. They will just pass the bill to someone else (who does not realize that they are paying the tax bill.) Yes, some of those people are rich, particularly stock owners, but many are in the middle and lower levels of income.

The reality is that corporate investments have a huge impact on long-term economic growth, and they should be encouraged to do so. Our current federal corporate income tax (even after Trump’s 2017 reforms) does not do that.

Corporations are far more likely than any other individual or institution to know which investments best lead to long-term profitability. They are experts in the field because their livelihoods depend on being experts.

And corporate taxes do not raise that much revenue

Despite having a clear negative effect on future economic growth rates and not actually being paid for by corporations, corporate taxes do not actually raise that much revenue. Corporate income taxes raise only about 10% of federal revenue and a mere 3.9% of total government revenue (including state and local).

Corporate income taxes are not much more than a rounding error of the total federal revenues and spending. This strongly suggests that cutting corporate income taxes can unleash long-term economic growth while having a relatively minor impact on the federal deficit. This is likely the opposite effect of cutting personal income tax rates.

Main goals

I believe that the main goals of federal corporate income taxes should be to:

1. Simplify the tax so that corporations make investments based on long-term economic returns, not gaming the tax deductions.

2. Encourage American and foreign corporations to create jobs and invest. Corporate investments are the proximal cause of long-term economic growth. A tax system that discourages corporate investment is a bottleneck that undermines all other causes of long-term economic growth.

3. Have the lowest corporate tax rates in the world (or at least among sizable nations), so those jobs and investments are concentrated on American soil.

4. Avoid discouraging immediate investments.
   The American government should not subsidize corporations, but neither should it incentivize corporations to avoid making potentially profitable investments merely because of the tax code. If corporations believe that they will benefit from immediate investments, federal policy should not cause them to delay those investments because of taxes.

5. Raise at least some revenue.
   Note that this is the lowest priority. Strong economic growth will inevitably increase incomes, which will create additional revenues through progressive income taxes. Those individuals cannot pass through their taxes to others as corporations can. And progressive taxes actually do tax upper-income citizens at far higher rates than middle- and lower-income citizens (see graphic below). That is far better than trying to raise revenue directly from corporations and undermining long-term economic growth.
   For this reason, I believe that progressive personal income taxes along with low corporate income taxes is the best of both worlds.

My proposal

• Eliminate all tax deductions from federal corporate income taxes (with one big exception mentioned below). This would radically simplify the tax and almost eliminate the indirect costs of calculating the taxes owed.

• Lower the rate to 10% (this would give the USA the lowest rate in the world, except for a few small tax-haven nations). This would give a powerful incentive to both foreign corporations and American companies to base their operations in the United States. This would likely have a far bigger impact in putting America First than tariffs.

  

  

• Enable corporations to deduct the entire amount of capital investments in the first year (as opposed to the current practice of pro-rating them over many years). This reform (plus the other reforms listed in this series) would likely cause a massive increase in capital investments in the very first year that the reform is enacted. This is exactly what we need to create a short-term economic boom that leads into a long-term economic boom.

• Tax distributed earnings to shareholders only, which allows corporations to reinvent their profits tax-free. This will give corporations more capital to invest and treats debt-financed investments the same as investments financed by retained earnings.

• Enable online filing of corporate taxes for no fee. With such a simple tax, it should be trivial to input the distributed earnings to shareholders, which must be computed anyway.

• (as an alternative to tariffs) Eliminate all federal corporate income taxes for corporations that:

  • Have all their employees within the United States (except overseas marketing and sales employees), and

  • All their sub-contractors have the same.

I generally do not believe in supply-side economics, but the combination of low and simple corporate taxes that encourage private investments with progressive income taxes is likely the best means for:

• Creating both short-term and long-term economic growth

• While minimizing revenue loss. It is even possible that my proposed reform will raise more revenues than the current system.

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This article is part of an extended series of articles giving policy reform advice to the Trump administration from the Progress-based perspective. If you have not yet done so, I would suggest:

1. First reading Priorities for the second Trump administration to understand the constraints that President Trump must operate within, and

2. Then reading the rest of the series from the “Table of Contents”.

If you enjoyed this article, you might enjoy reading my “From Poverty to Progress” book series: