Tom Williams | CQ Roll Call
Speaker Paul Ryan, R-Wis., and House Majority Leader Kevin McCarthy, R-Calif.
Economists all agree that tax reform is pro-growth if it broadens the base (such as by eliminating deductions) while reducing marginal tax rates. There is less agreement on other aspects of the issue, such as which types of households should see tax cuts, whether a lower corporate rate would benefit workers or shareholders the most, and whether it would be a good idea for the government to bring in less tax revenue overall.
Given all this, what type of tax reform should be our highest priority? In our current situation of low economic growth, the answer appears to be lower rates.
Your marginal income-tax rate is the percentage you pay in taxes on your last (or next) dollar of income. If you’re in the 25 percent tax bracket, for example, your marginal rate is 25 percent — you lose 25 cents of each additional dollar you make, even though your average tax rate will likely be closer to 10 percent of your total income after deductions, credits, and exemptions are applied. Lower marginal rates help boost growth because they increase individuals’ incentive to work harder and businesses’ incentive to invest in new opportunities. While people debate how big this effect is, it is a consensus belief that lower rates are pro-growth even when coupled with base-broadening measures that ensure the same amount of tax revenue is collected.
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When it comes to the corporate income tax, rate cuts not only spur growth but raise wages as well. Glenn Hubbard, dean of the Columbia Business School and a former head of the White House Council of Economic Advisors, has written that 70 percent of corporate tax cuts may go to higher wages instead of payouts to shareholders. Other research has suggested a range of 45 to 75 percent.
This idea, that cutting taxes on corporations actually benefits workers along with shareholders, is more controversial and much less appreciated. However, among experts in the field it seems to be a reasonably well-shared and non-partisan view. This is important because the more middle-class workers benefit from cuts to corporate tax rates, the more such cuts are consistent with the ideals of a progressive tax system.