In a previous article, we looked at three policy areas ripe for large “positive supply shocks” and a rapid return of the U.S. economy to a high-growth, low-inflation situation: Energy production, tax cuts, and regulations.
First, Americans could see a significant reduction in energy costs under Trump’s “drill, baby, drill” plan designed to unleash American “energy dominance.” Next, we turn to phase two of Trump’s supply-side suite, the tried-and-true tool of widespread tax reductions.
Tax Cuts
To frame our discussion of supply-side tax cuts, let’s briefly review the “determinants of supply” — factors that can shift a product’s supply curve, summarized by the acronym TTEP#: Technology, Taxes, Expectations, Price of resources, # of producers.
The area where government can have a large and sudden impact should be screamingly obvious: taxes.
Yes, taxes are needed to fund essential government services. But economists recognize that taxes are costs. Higher sales taxes raise the cost of goods; higher income taxes raise the cost of earning a living; higher corporate taxes raise the cost of running a business. Obviously, reducing taxes on work and production (business and individual income taxes) will reduce the overall cost of producing goods, stimulating more work and production, and thus shifting supply curves to the right. Donald Trump understands this intuitively, which is why one of his signature agenda items in his first term was a large tax cut, particularly focused on business (corporate) taxation, via the Tax Cuts and Jobs Act of 2017 (TCJA).
Supply-side tax cuts have been tried and found amazingly successful on multiple occasions in U.S. history. Large income tax cuts in the 1920s (Mellon-Coolidge), 1960s (Kennedy-Johnson), 1980s (Reagan), and 2017 (Trump) led to corresponding economic booms and strong growth in personal income, output, and employment.
The history and impact of these (and more) tax reforms was chronicled by the Godfather of modern supply-side economics, Arthur Laffer, with coauthors Brian Domitrovic and Jeanne Sinquefield, in their recent book, “Taxes Have Consequences.” As I noted elsewhere, the authors document no less than five distinct episodes of significant tax cutting, from Mellon’s aggressive 1920s rate cuts, to the 2017 Tax Cuts and Jobs Act, which Art Laffer himself promoted as an advisor to the Trump Administration. Each tax cut generated an economic boom with above-trend GDP growth and (eventual) increases in federal income tax revenue. “Taxes Have Consequences” is a fact-based, unassailable chronicle of the power of tax rate reductions and tax code simplifications to supercharge economic growth.
Trump’s tax agenda for 2025 has two big parts and several smaller ones. The TCJA cuts are scheduled to sunset at the end of 2025, so the priority will be making them permanent. The other big tax change Trump proposed on the campaign trail is a further significant reduction of the corporate income tax, from 21% down to a world-beating 15%, contingent on corporations promising to onshore production. Other measures of note include allowing 100% deduction of most business investment spending, and eliminating taxes on tips and Social Security benefits.
Skeptics and doubters will, of course, bristle at further tax cuts. Leftists will whine about “tax cuts for the rich” and pooh-pooh their favorite bogeyman of “trickle down economics.” Even some wimpy conservatives will argue that most of the tax cut juice was already squeezed out in Trump’s first-term reforms, and that further tax cuts risk significant increases in the federal deficit and debt. Trump knows from experience, however, that tax cuts are still a powerful tool. After all, the top income tax rate right now is still 37%; Reagan’s reforms got us down to a top rate of just 28% by 1988, so there’s still room to cut.
As a world-class businessman, Trump knows that pushing that corporate rate down even lower can turbocharge business formation and capital spending, the underlying factors driving growth in productivity, jobs, and wages. When Trump first entered office in 2017, the U.S. corporate income tax was among the highest in the world at 31%. Even with the TCJA reduction to 21%, the U.S. still taxes corporate profits at a higher rate than most European countries. There’s much more room to trim these taxes and improve America’s business climate.
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As for the revenue & deficit impact: as Art Laffer reminds us, tax cuts have the potential to boost government revenue, as the “incentive to work/ earn more” effect can swamp the “government gets a smaller slice of my paycheck” effect.
Trump has also made statements about possibly offsetting income tax revenues with new tariffs, which is causing heartburn for some hardcore free-trade, libertarian economists. While I’m not a big fan of “protectionist” tariffs, I think it’s smart to view Trump’s threat of tariffs as both a hardball negotiating tactic and part of a bigger vision of pro-growth tax reform. Indeed, Trump has even made recent statements about eliminating the income tax altogether and replacing it with a pre-1913-style revenue tariff. Any free market economist worth his salt should see such a move as the biggest positive supply shock in world history. Income taxes are one of the most costly and economically distorting ways to raise revenue. Leftists pushing high tax rates have been open about using the income tax regime mainly as a tool of social engineering and redistribution, efficiency and incentives be damned. Reductions in compliance costs alone would justify swapping the income tax for tariffs.
This kind of radical reform is far off, but Trump’s overall instincts are good here. Keep trimming away at taxes on the work and investment incomes of Americans, and reap the benefits of boosting incentives for production and capital formation. He did it before with 2017’s TCJA, and through a renewed focus on strategic tax cuts, he make America’s economy boom again.
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RELATED: Supply-Side Trumponomics, Part One: ‘Drill, Baby, Drill’
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Tyler Watts is a professor of economics at Ferris State University in Big Rapids, Michigan.
The views expressed in this piece are those of the author and do not necessarily represent those of The Daily Wire.
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