Kudlow's Corner

Larry Kudlow: A pro-growth GOP tax cut is on the way — this year

Key Points
  • One way or another, Congress will come up with a significant pro-growth bill, writes Larry Kudlow.
  • Business tax cuts must remain the centerpiece of the tax bill, which is good for the middle class.
  • The GOP should consider going 'nuclear' to get reform done this year.
House Ways and Means Chairman Kevin Brady, R-Texas, left, and Speaker Paul Ryan, R-Wisc., joined by members of the House Republican leadership, introduce tax reform legislation Nov. 2, 2017, in Washington, D.C.
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As the U.S. House of Representatives and Senate work their way through the tax-cut-and-reform effort, let me make one thing clear: Both plans are pro-growth where the economic power comes from the business side. And where it comes from the personal side, there will be very little growth. That was always the bet.

During the spring and summer of 2016, economist Steve Moore and I, working with Trump campaign officials Steven Mnuchin and Stephen Miller, saw major tax reductions for large and small businesses as the centerpiece of the candidate's tax policy. Whatever Congress came up with on the personal side, so be it.

So one way or another — even with the glitches and differences between the House and Senate tax plans — Congress will come up with a significant pro-growth bill, because business tax cuts are still the centerpiece. And they should do it this year.

Last Tuesday, I spoke at the Senate Republican breakfast in Washington, and the whole leadership was there. What I observed was a total commitment among the GOP senators to get a tax bill through by year-end: This will not be another health-care breakdown.

Particularly after recent GOP electoral setbacks, the party knows it needs a strong tax-cut and economic-growth narrative for the 2018 midterms. If Republicans don't get it, they'll lose control of Congress.

And if they do get it, they may even pick up seats. The political stakes are high.

Flanked by Speaker of the House Paul Ryan and House Ways and Means Committee chairman Rep. Kevin Brady (R-TX), President Donald Trump kisses an example of what a new tax form may look like as he speaks about tax reform legislation in the Cabinet Room at the White House, November 2, 2017 in Washington, DC.
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'Glitches' and a 'mishmash' of good and bad ideas

As mentioned, there are glitches in both the Senate and House tax plans, but most of them can be corrected. And the differences between the two plans should narrow in conference.

The all-important business tax rate will come down to 20 percent from 35 percent. That's the key to economic growth, and the biggest beneficiaries will be middle-class wage earners.
The issue of small-business pass-throughs is not completely resolved. It seems the Senate has a better take on this than the House. But there's a small-business tax cut coming.

The Senate's idea to phase in the new corporate tax rate in 2019 is a bad idea, and President Donald Trump agrees. To be sure, the GOP senators want full cash expensing for capital expenditures projects for 2018. Good. But as Art Laffer warns, if you hold back the actual rate reduction, you'll see a lot of tax avoidance and sheltering next year.

That will include offshoring. A delay will deter foreign companies from coming to the United States. You may wind up losing revenues — perhaps as much as $100 billion.

On the House side, the so-called "bubble rate" of 45.6 percent is also not a good idea. It's being done to claw back the 12 percent rate high-end earners move through on the way to 40 percent. But why punish success?

Those upper-end folks are largely investment-oriented. As FedEx CEO Fred Smith said, it's time to stop punishing investment: That includes businesses and individuals.

I assume this will be fixed in conference. Let the Democrats be the class warriors who tax the rich. GOP stands for growth.

There are other issues. The personal side is a mishmash of credits and deductions. This is no Ronald Reagan tax bill of 1986. Good tax reform slashes individual rates so that reductions and loopholes are no longer necessary.

But there's no slashing on the personal side, and it will be a fight over deductions. And frankly, I'm underwhelmed by the deduction part.

I keep thinking: Why didn't the House and Senate simply agree on a 3 percent growth rate? And why haven't they embraced the Trump administration's argument that the business tax cuts will pay for themselves and generate 3 percent growth over the next decade?

House and Senate negotiators agreed on a 2.6 percent growth baseline. It's better than the CBO's 1.9 percent. But with 3 percent, they would have picked up $500 billion to $700 billion in additional revenues from faster growth.

Unfortunately, no model captures the significant pro-growth effects of international flows, such as repatriation and the possible capital inflow from foreign companies. Is it possible this could be changed in conference? Just a thought.

As John F. Kennedy and Ronald Reagan argued, when we are strong at home, we're strong abroad.
Larry Kudlow

Of course, that old bugaboo is back: the Byrd rule. It annuls tax cuts if they promote deficits after ten years.

So here's another thought: Senate Majority Leader Mitch McConnell used the nuclear option to end the filibuster on Supreme Court justice Neil Gorsuch. So why not nuclear-option the Byrd rule? Vice President Mike Pence is ready in the wings to override any objection.

The GOP must not let process stop growth-producing tax cuts. Growth is too important. So let's play hardball, GOP, and do what's necessary to get these pro-growth tax cuts legislated and signed before year-end.

That will move the American economy back to the top of the worldwide heap. As John F. Kennedy and Ronald Reagan argued, when we are strong at home, we're strong abroad.

Commentary by Larry Kudlow, a senior contributor at CNBC and economics editor of the National Review. Follow him on Twitter @Larry_Kudlow.