Crucial Tax Cuts, a la Newt

Yesterday morning, I (along with a number of other Show-Me Institute staffers) attended a talk by Newt Gingrich, hosted by Delta Dental. He outlined four major tax changes that he thought were worth supporting to grow the economy (and, thus, make it feasible to support programs like Medicare).

Newt Gingrich’s four major tax changes:

1. A two-year, 50-percent tax reduction for Social Security and Medicare (including employer match).

Gingrich suggested this would provide a sort of “raise” for people, by increasing their take-home pay. By eliminating the employer match, the tax burden per employee small businesses would decrease, which would encourage businesses to hire more employees. This type of temporary tax cut might not be terribly effective on its own, however, as forward-looking people recognize their tax burdens will be unchanged over most of their planning horizon.

2. Eliminating the capital gains tax — like in China.

3. A 12.5-percent corporate tax rate — like in Ireland.

Nos. 2 and 3 would promote business growth (and provide an incentive for industries to stay in the United States). Our current corporate tax rate is 35 percent, which creates an economic incentive to move operations overseas — to Ireland, for instance, which has the lowest rate. By lowering the U.S. rate, government might capture less revenue, but this policy change could easily lead to capturing more — 12.5-percent collections on a business that stayed in the United States is much higher than 0 percent for a business that departed. And this doesn’t take into account the fact that lower business tax burdens lead to spurred economic activity.

4. Abolish the death tax.

Why should taxed income be taxed a second time? At any rate, an estate tax — in which the government gets paid when somebody dies — seems like a perverse policy incentive, especially considering the larger role that government wants to play in health care.

Personally, I think all these tax cuts are great ideas. As Show-Me studies have demonstrated time and time again, lower taxes promote economic growth. Solidifying a new growth trend is crucial before we even consider increasing government’s role in health care — something that should, of course, be minimized when at all possible.