Republicans Need a Tax Plan for 2017, Not 1981

Supply-siders argue that reducing tax rates increases incentives to work, save and invest. But this logic is subject to diminishing returns. The 1981 bill raised the after-tax return on a dollar earned from 30 cents to 50 cents: a 67% increase. Cutting the top tax rate from 40 to 30% now would yield an increase of only 17%.

Another way of putting it is that today’s tax rates aren’t the obstacle to growth that the rates of the 1970s were. Bringing them down should not be as high a priority for today’s Republicans as it was for their predecessors.

Third: The payroll tax for Social Security and Medicare has grown in importance while the income tax has shrunk. In 1981, only 20% of households escaped paying the income tax. Now 44% do. For three-fifths of households, the payroll tax is a bigger burden than the income tax. If Republicans want to provide relief for the middle class, they should be looking at reducing payroll taxes and not just cutting income-tax rates as they did in 1981. One option would be to apply an expanded child credit against payroll taxes.

Fourth: The corporate tax rate has become a bigger problem. It has fallen since 1981, from 46% to 35%. But other countries have cut their rates further. In 1981, the corporate tax rates for Germany, the U.K. and Ireland were 56, 52 and 45, respectively. Now they are 39, 19 and 12.5. The U.S. corporate tax has made the country a less attractive place to invest, and rectifying that problem should be a priority for modern tax reform.

To their credit, Republicans are dealing with some of these new realities. They’re giving more attention to cutting the corporate tax rate than cutting the top income-tax rate. But it remains to be seen how much they are willing to change. The old reflexes are still strong, even if they were adapted for an environment we no longer inhabit.