The Tax Cuts and Jobs Act currently being considered by the Congress, according to Martin Feldstein, Chairman of President Reagan’s Council of Economic Advisors and renowned Harvard Economics professor, “could increase the U.S. capital stock by $5 trillion and cause a $500 billion rise in annual income.” Yet, many special interest groups will take aim because their tax preferences are being eliminated or reduced. Most Virginia families, however, will benefit significantly, as would the Virginia and U.S. economy. It is critically important that Virginian’s look at the overall benefits of job creation, investment, economic growth and simplification and focus on the forest and not the individual trees.
The tax code has not been reformed since the author worked on the 1986 Reagan tax reform. The tax code has become a mess of special interest provisions, complex global tax rules and loopholes and a burden on U.S. business and our economy. Our corporate tax stifles small business, is too complex and encourages multinational corporations, many of which reside in Virginia, to hoard their global income abroad in lower tax environments. The Tax Cuts and Jobs act will reduce taxes on pass through small businesses from 35% to 25% and the overall corporate tax rate will drop from 35% to 20%, from almost the highest in the world to one of the lowest. This will stimulate significant wage increases of $3,500 to $9,000 per worker annually, according to economists Laurence Kotlikoff and Kevin Hassett.
While measures of who bears the incidence of the corporate tax are constantly debated, it should be understood that corporate taxes are passed on to owners (shareholders via reduced dividends and stock prices), consumers (in higher prices) or workers (in lower wages or fewer jobs). Shareholders, consumers and workers are all benefit from a lower corporate tax rate.
In recent years, Virginia’s position as a low tax and pro-business state has dwindled. According to the Tax Foundation, we now rank 33rd out of 50 in its “Tax Climate Index” calculation. Since Virginia’s tax code dovetails with the federal tax code, the positive impact of tax reform on the Virginia economy could be profound.
The increase in the standard deduction to $24,000 will greatly simplify the tax code for the majority of Virginia families and allow them to keep more of their hard earned money. Individual rate reduction will also reduce taxes on most wage earners, reducing 7 tax brackets to four, at 12%, 25%, 35% and the current top rate of 39.6%. Most Virginian’s would fall into the 12% and 25% brackets. In high income Northern Virginia, married taxpayers earning under $260,000 per year would fall into the 25% rate. The 35% tax rate and top rate of 39.6% would fall on only the estimated top 2% of income earners.
And what will the regional impacts be for Virginia from these proposed tax changes? Some high income Northern Virginian’s could see overall increases… those who have several homes and earn over $500,000 per year. However, if they are small business owners, they will likely see tax reductions. With lower corporate tax rates, the U.S. will again become a target for foreign investment and it is likely that Virginia will gain investment capital and global business startups due to our lower rates. Allowing 100% of expensing for corporate investment will be a huge boon to our technology and manufacturing sectors.
Government workers, even two income families, will likely see reductions in taxes and lower level government workers most certainly will benefit from the increase in the standard deduction. Wages for private sector corporate workers will also rise. Some of the corporate tax reduction will be passed through to workers and productive investment will rise.
Finally, military families should see benefits and the Port of Norfolk should thrive. The lowering of rates and increase in the standard deduction, as well as the increase in the child tax credit to $1,600, should significantly help active duty military families.
Some special interests will attack reductions for the high income earners in state and local tax deductions, a cap on mortgage interest at $500,000 instead of current $1 million, and eliminating mortgage interest on second homes or vacation homes. These are just a few of the individual and decaying trees and underbrush in the forest. Their advocates will pull out all stops to save their trees, and ignore the fact that nearly all Virginia taxpayers will benefit from reduced rates, more jobs, more exports, higher wages and a greatly simplified tax system.
The tax code has become a forest filled with old and dying trees that need to be culled for more vibrant growth and expansion. It is critical to support this effort since a growing GDP, higher wages and lower unemployment cannot be overlooked in the coming debate.