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November 20th, 2017

Insight

The simple arithmetic that could jump-start America’s economic growth

George Will

By George Will

Published Feb. 1, 2016

Kevin Brady (R-Tex.), chairman of the House Ways and Means Committee, in Washington.

Woodrow Wilson, who enjoyed moralizing about the mundane, called paying taxes a "glorious privilege." In 1865, when there was a Civil War income tax, one taxpayer shared this sensibility, sort of. Mark Twain said that his tax bill of $36.82 (including a $3.12 fine for filing late) made him feel "important" because the government was paying attention to him. Today, Rep. Kevin Brady wants to change the way government pays attention to taxpayers.

Congress is like a Calder mobile: Something jiggled here causes things to wiggle over there. When conservatives toppled House Speaker John Boehner (R-Ohio), they inadvertently propelled Brady into the House's most important chairmanship, that of the Ways and Means Committee. Because revenue bills must originate in the House, Brady now wields Congress's most important gavel, all because the committee's previous chairman, Paul Ryan (R-Wis.), now sits in Boehner's chair.

If there is going to be growth-igniting tax reform — and if there isn't, American politics will sink deeper into distributional strife — Brady will begin it. Fortunately, the Houston congressman is focused on this simple arithmetic: Three percent growth is not 1 percent better than 2 percent growth, it is 50 percent better.

If the Obama era's average annual growth of 2.2 percent becomes the "new normal," over the next 50 years real gross domestic product will grow from today's $16.3 trillion (in 2009 dollars) to $48.3 trillion. If, however, growth averages 3.2 percent, real GDP in 2065 will be $78.6 trillion. At 2.2 percent growth, the cumulative lost wealth would be $521 trillion.

Brady, however, would like to start with the approximately $2 trillion that U.S. corporations have parked overseas. Having already paid taxes on it where it was earned, the corporations sensibly resist having it taxed again by the United States' corporate tax, the highest in the industrial world. "[The $2 trillion] won't just naturally fly back to us," Brady says. Measures should be taken to make it rational for corporations to bring money home. And to make it rational for corporations such as Pfizer, which recently moved its headquarters to Ireland for tax purposes, to remain here.

In the past 30 years, Brady says, more and more taxes have been paid by fewer and fewer people. And fewer and fewer businesses have been organized as corporations: Three-quarters of job-creating entities are not paying corporate taxes.

Strom Thurmond in 1948 and George Wallace in 1968 had all three and won 39 and 46 electoral votes, respectively. In 1992, Ross Perot had a sandpapery personality and the deficit issue but he lacked a regional base, so his 18.9 percent of the popular vote won zero electoral votes.

"You can't," Brady says, "ask people to make big changes, leapfrogging our global competitors, just to get to average." But making big changes "is why we all came to Congress." And the benefit that comes from something unfortunate — the fact that there are so few (perhaps fewer than 40) competitive House seats — is that members can take risks. Presidential engagement is necessary for tax reform, and Brady says that will require a new president who understands that "just a little respect goes a long way up here [on Capitol Hill]."

All Republican presidential candidates have tax reform proposals, but only one candidate proposes increasing the cost of government for every American. Here, at last, Donald Trump actually resembles a Republican. Unfortunately, it is a Republican from 125 years ago, when the party stood for big government serving crony capitalism with high tariffs.

As Steven R. Weisman demonstrates in his splendid history of American taxation, "The Great Tax Wars," the GOP's tariffs were indirect, hidden sales taxes that crimped consumption by Americans with small incomes. In 1913, the first year of Wilson's presidency and the year the 16th Amendment and the income tax arrived, the glorious privilege of paying taxes was enjoyed primarily through tariffs: They provided nearly half of federal revenues, with most of the rest coming from tobacco and liquor taxes, which also were hardest on people of modest means.

Trump, who works himself into a lather because Nabisco is making some Oreo cookies outside the country, is obsessed with the United States' trade with China. "We're going to get Apple to start building their damn computers and things in this country," he says, aiming to raise the price Americans pay for Apple products that today are assembled in China, which, according to trade attorney Scott Lincicome, makes about $6 by assembling an iPhone from parts (many of which China has imported).

Trump favors a 45 percent tariff to protect customers of Walmart and similar retailers from the onslaught of inexpensive Chinese apparel, appliances and food. He can explain the glorious privilege of paying taxes-as-tariffs when he makes his next visit to a Walmart, perhaps the one in Secaucus, N.J., just seven miles from his Fifth Avenue penthouse.

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