No one knows the future direction of the US economy, but several danger signs are ahead. One is continued inflation at 40-year highs or worse – a cruel hidden tax eating away at wages and savings, with more suffering for families struggling to pay for groceries and gas. Another is a recession triggered by high interest rates meant to fight inflation. That means job losses, lower incomes, smaller economies as stock markets contract, and even tougher times for businesses reeling from supply chain shortages.
Yet President Joe Biden and his congressional allies still haven’t learned the economic lesson that governments can’t tax and spend their way to prosperity. They continue to believe that a better outcome is just one giant deficit-financed program or one more tax-the-rich scheme down the road.
Fortunately, policymakers have the opportunity to steer the country in a truly hopeful direction by making the Tax Cuts and Jobs Act (TCJA) permanent and working to reduce government spending. States like Iowa are already well along this proven path with their own policies, offering better prospects for economic growth and a stable financial footing.
The Tax Cuts and Jobs Act passed under the administration of Donald Trump and, with the freedom of businesses from over-regulation, created a strong economy. The tax relief generated by the TCJA has benefited both individuals and businesses. Employment increased and many companies offered bonuses to their employees. And contrary to the opposition’s scare campaigns, the rich paid more income taxes, and the poor paid less.
Income levels also increased as many Americans earned higher salaries. “In 2018 and 2019, real median household income in the United States increased by $5,000 – a larger increase in just two years than in the eight years of the previous recovery combined,” wrote economists Kevin Hassett and Tyler Goodspeed, who have both served as presidents. of the White House Council of Economic Advisers under Trump.
The economic growth generated by the Tax Cuts and Jobs Act has resulted in increased federal government revenues. This is often overlooked, and tax cuts have been blamed for causing deficits, when the real culprit was government overspending. Between 2000 and 2019, inflation-adjusted federal spending increased 69% before billions of additional dollars were spent during the pandemic.
The Tax Cuts and Jobs Act also showed many states how to lower their income and corporate tax rates. This was especially true due to the capping of the state and local tax deduction, or SALT, at a reasonable $10,000. In 2018, Iowa passed a comprehensive tax reform measure, followed this year by the largest tax cut in state history.
Governor Kim Reynolds signed a tax reform measure that creates a low flat rate personal income tax of 3.9% by 2026 and will gradually reduce corporate taxes to 5.5%. Reynolds made prudent budgeting and tax reform a priority.
“On the economic level, the contrast could not be more striking. While DC Democrats are spending billions of dollars, driving up inflation, the country’s Republican leaders are balancing budgets and cutting taxes. Because we know that money spent on Main Street is better than money spent on bureaucracy,” Reynolds said in his response to Biden’s State of the Union address.
Critical parts of the TCJA that affect business spending, research and development, small business relief, and low personal tax rates expired this year or are set to do so at the next Congress. Action in Washington is needed to resolve these issues and address other longstanding flaws in the federal tax code.
For example, last month, U.S. Senator Chuck Grassley of Iowa introduced a bill called the Middle-Class Savings and Investment Act, which would allow each taxpayer in brackets of up to 22% (about $89,000 for a single filer) to invest virtually federal tax-free. The interest income deduction would increase, as well as the “Savings Credit” for low-income households. Grassley’s legislation is wisely “paid for” by extending the SALT ceiling.
Reynolds, Grassley and other fiscal conservatives will not necessarily change the progressive mindset. We are more likely to see Elvis at the grocery store. But over time, their leadership — and the data — can demonstrate that moderate taxes and spending restraint pave the way for a better future.
John Hendrickson is policy director of the Iowans for Tax Relief Foundation and Pete Sepp is president of the National Taxpayers Union