TAX REFORM FOR BOTH CAPITAL AND LABOR

Growth is the problem. Or more precisely, slow growth is the problem. It’s the reason so many public policy questions in the United States now seem impossible to resolve. And it is the reason about 65 percent of voters believe the country is on the wrong track, according to an averaging of recent public polls by RealClearPolitics.

The public is right to be concerned. The government announced today that GDP growth was 4.6 percent in the second quarter of this year. Normally, that would be a good number. But it comes on the heels of a 2.1 percent decline in GDP in the first quarter. The combined growth for the first half of the year was therefore just 1.25 percent.

Marco Rubio, Mike Lee

Sens. Rubio (left) and Lee put forward a tax proposal this week that would significantly benefit working families.

The extremely slow pace of economic growth in the first part of this year fits with the trend since the nation emerged from the deep recession associated with the financial crash. Average GDP growth from 2010 through 2013 was just 2.2 percent.

So restoring a faster pace of economic growth must be the nation’s top priority. Without more growth, every other problem is likely to get worse, not better, no matter how much effort is put into solving them. Among other things, it will be very difficult for the U.S. to assert itself in world affairs over the long-run with an anemic domestic economy. And it is lower income households, not the rich, who will suffer the most if the country remains stuck in slow growth indefinitely.

Many analysts are making the case that a fundamental impediment to faster growth is the dysfunctional U.S. tax code as it applies to both individuals and corporations. Some policymakers agree. Recently, Senators Mike Lee and Marco Rubio laid out a blueprint for fundamental restructuring of both the individual and corporate income tax systems.

The Lee-Rubio plan is focused correctly on creating a simpler, less distortionary tax law. The tax base would be broadened by closing loopholes and limiting deductions. This would allow for a substantial lowering of rates. For individuals, they propose folding today’s multiple tax brackets into just two: 35 percent for higher income households, and 15 percent for everyone else. The corporate income tax rate would be lowered from today’s 35 percent to very likely a level in the range of 20 to 30 percent.

“Investment capital is critical to improving productivity…but the U.S. needs a growing, educated, and dynamic workforce too.”

Importantly, the Lee-Rubio plan also provides a large tax cut for families raising children. They would provide an additional $2,500 per child on top of today’s child credit of $1,000. Consequently, their plan would provide substantial tax relief to working families with children – far more than traditional tax reform plans that focus entirely on lowering income tax rates.

Some critics, such as Dan Mitchell of the Cato Institute, believe the focus on supporting middle class families with children is mistaken. He urges lowering the top rate below 35 percent instead, arguing that such a plan would produce faster economic growth, and thus help middle class families even more than an expanded child tax credit.

But it is important to realize that strong economic growth is not just about unlocking more investment capital to grow businesses. It is also a function of an expanding and more productive labor force. Indeed, economic growth is really just the sum of change in the size of the workforce plus the change in the workforce’s productive capacity.

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Investment capital is critical to improving productivity, and reducing the top marginal tax rate would spur more investment because investors would keep more of the returns.

But the U.S. needs a growing, educated, and dynamic workforce too. The Lee-Rubio tax credit expansion would give families more resources to invest in what will become the future workforce of the American economy.

An expansion of the child credit isn’t the only option for a pro-family tax cut. Another approach would be to lower directly the payroll tax rate paid by workers on their wages. After all, the payroll takes a bite out of every worker’s paycheck. Reducing it would encourage some businesses to hire more workers, and some workers to devote more hours per week to their jobs.

The particulars of a sound tax reform plan should continue to be debated over the coming months. What should not be in dispute, however, is the need for a pro-growth reform plan that is attentive both to those making investments in American businesses and to those who work for them.

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EXPERTS: TRANS-PACIFIC PARTNERSHIP WILL “REVITALIZE TRADE IN THE REGION”

  
JOBS WORLDExperts: Trans-Pacific Partnership Will �Revitalize Trade in the Region�

Given recent events in France, Kuwait, and Tunisia, the world is still a dangerous place. It’s also a more competitive place for trade and businesses, which is why speakers at the Hudson Institute’s discussion trade were focused on the Trans-Pacific Partnership, or TPP, and its importance to the U.S. economy.

The event, which came just a day after a much-scrutinized vote by the Senate to approve fast-track negotiation authority for President Obama, featured Thomas “Mack” McLarty, former chief of staff to President Bill Clinton; Armando González, the chief editor of the Costa Rican publication La Nacion; and Evan Ellis, a professor of Latin American Studies at the U.S. Army War College Strategic Studies Institute.

McLarty, a key player in the passage of the North American Free Trade Agreement in 1994, provided the keynote remarks focused on just how much the world has changed since that ground-breaking trade agreement. Noting how Facebook, Twitter and the broader Internet have transformed the world we live in and the way we do business, he said, “We should update the agreement and bring it forward into this century. … [The TPP] will be a catalyst to revitalize trade within the region.”

McLarty also noted that TTP would provide a strong counterbalance to China’s aggressive trade strategy, not only across the Pacific, but in the United States’s own hemisphere. China is the largest trading partner with many Latin American countries, and the Trans Pacific Partnership would help America to compete.

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Mack McLarty (at podium) refers to TPP as NAFTA 2.0 and a necessary agreement to bring the United States trade apparatus into the 21st century. | Photo: Hudson Institute

As outlined, the partnership would include the U.S. and eleven other countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. These countries make up roughly 40% of the world’s economy. McLarty in the past has referred to the trade pact as NAFTA 2.0, and similar to that 20-year-old agreement, the framework for TTP was started by one of the Bush Administrations with a Democrat in the White House trying to bring it over the finish line.

González agreed with McLarty, offering the perspective of one from a Latin American country. He said the United States would be wise to sign a deal that would include such a large portion of the world’s GDP. “Central and South America are the fastest growing markets currently,” said González, adding that the deal would span the entire length of the Americas, from the Straight of Magellan up to Alaska.

Ellis chimed in to back up González, adding that not only was the pact good to balance China’s trade influence, but also to grow the economies of emerging markets in Latin America and elsewhere. He also placed spotlights on two of the areas where conservatives on Capitol Hill and among the grassroots and Democrats have focused their ire around broader trade issues: transparency and the future of the U.S. Export-Import Bank. “The Pacific Alliance focuses on eliminating impediments to free flow of goods, capital, people and information between member states,” he says.

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Evan Ellis stressed that the TPP is a necessary step to counter China’s aggressive investment in Latin American countries | Photo: Hudson Institute

Ellis stated TPP should focus on encouraging greater transparency among the trade relationships to build stronger overall relations. He also called on rejuvenating the US Export-Import banks and international university work in order to further connect the partnership countries and better understand the differences in business. “We must instruct and inform countries in order to sign into the Trade agreements and then follow up with consistent freedom of market and success for economic growth,” he said.

González noted that, “One benefit of the TPP is making sure that every country has an interest in keeping the playing field even. Free trade will be able to have all countries hold each other accountable.”

Ultimately, though, McLarty said in drawing the panel to a close, TPP is about the United States and ensuring its position as the global trade leader around the globe. “Trading with other countries reflects reality… To be strong abroad we must be strong at home. But in order to stay strong at home, we must be engaged abroad.”