“Kee” Points with Jim Kee, Ph.D.

President Trump signed the Republican tax cut bill into law on Friday, and he also signed a continuing resolution that will keep the government open through January 19th.

 

What’s exciting about the tax cut is that it is occurring in a deregulatory environment: In prior Kee Points I have talked about business tax reductions as offering a far higher growth “bang for the buck” than individual rates at this point, and that appears to be where a lot of the net rate reductions occur. Economists often talk about how the “rate effect,” or the change in tax rates, is the most important aspect of tax reform for economic growth. Deductions, rebates, etc., might be important for other reasons, but not for growth [for those with real economics training or coursework, the assertion is, “the first-order incidence of price or excise effects over income effects; income effects sum to zero”].


Back in 2011, in an interview with The Economist magazine, economist Robert Mundell argued that the “secret to growth (the name of the interview) for the United States was to cut the 35% corporate tax rate, which Mundell said should be brought down to 20% and ideally to 15%. During the subsequent Presidential election the following year (2012), both parties ran on a corporate tax rate cut (Wall Street Journal). Mundell focused on corporate rates because he felt that individual rates had already come down, at least by historical standards, and might be close to a “political equilibrium.” That’s a pretty profound insight, and it describes exactly what we just saw with the passage of the new tax law. The corporate rate was cut pretty dramatically; individual rates just a tad.


Also, at the beginning of the year, Raghram Rajan (former head of India’s Central Bank) pointed out that, as quoted in the January Kee Points, “The mere replacement of zealous regulatory personnel with more hands-off regulatory personnel would positively impact growth even with zero actual regulatory changes.” Within 10 days of taking office, President Trump issued Executive Order 13771, the order to reduce two existing regulations for each new one issued. That has been thus far achieved according to the Office of Information and Regulatory Affairs (WSJ). Some skepticism here is warranted, but the change in tone towards less regulatory growth is undeniable.


Putting the two together, any given growth incentive from tax reform will be more powerful under a hands-off regulatory environment than under a hands-on regulatory environment, for better or for worse. So it is the combination of the two that, in my opinion, makes the next few years more exciting to watch from a growth perspective.


Also, in last week’s Kee Points I mentioned that I intended to bullet-point some of the major line-items of the new tax law, but I would remind everyone that they should see their own accountant or CPA about how this tax reform will impact their own situation. With that said, here are a few highlights:


  • The 35% corporate income tax rate will be permanently reduced to 21% effective January 1, 2018.
  • Lower tax rates on corporate income earned overseas and brought back to the US.
  • 100% expensing of qualifying business investments made between September 27, 2017 and before January 1, 2023 (after which a gradual phasing down occurs).
  • Seven income brackets with rates at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • Mortgage interest tax deduction limited to $750,000 (and ending deductibility of interest on home equity lines of credit). That’s on new mortgages, not existing ones.
  • Estate tax retained but exclusion is doubled (from just over $5 million to approximately $11 million).
  • State and local tax deductions capped at $10,000.