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Thoughts on a Tax Cut

The Republican tax plan recently unveiled calls for as much as $6 trillion in tax cuts.  Will the cuts (assuming Congress can approve) be the needed boost for economic growth?

The chart below shows historical U.S. top marginal tax rates.  Kennedy's reduction of top tax rates from 91% to 70% seemed to be a real incentive for work and income, and the 1960s experienced strong growth.  Likewise, we experienced strong growth in the 80s and 90s when Reagan cut rates from 70% to 50%, then later to 28%.

Tax rates.png

Yet, it was a big disappointment from an economic growth standpoint when George W. Bush cut rates from 39% to 35%.  Why?  First, "W's" cuts came after a very long expansion of the economy.  Second, the cut from 39% to 35% was nothing like the incentives from 91% to 28%.  The policy that worked well in the early 60s and 80s didn't work so well in the early 2000s.

We are again in a period where we have already had a long expansion.  On top of that, we have big budget deficits that are set to rise sharply with a substantial reduction of federal revenues not offset with commensurate spending cuts.  With a federal debt that has ballooned to some $20 trillion and projected to continue to rise, this could in and of itself be a headwind to economic growth (chart below).

deficit.png

(charts courtesy Ned Davis Research)

stacey16.jpgIn conclusion, I am all for lower tax rates, a reduction of special interest deductions, and a less complex tax system.  However, tax reform is a complex issue.  As of 2014, the top 10% of income earners paid 70.9% of all federal income tax, while the bottom 50% paid 2.75%.

Stacey Wall serves as Chief Executive Officer of Pinnacle Trust.  You can follow Stacey on Twitter @pinntrust, email him at [email protected].com or by call him at 601-957-0323.