Kudlow's Corner

Kudlow: With this tax cut, Trump and the GOP are on the side of the growth angels

President Donald Trump speaks after the U.S. Congress passed sweeping tax overhaul legislation, on the South Lawn of the White House in Washington, December 20, 2017.
Jonathan Ernst | Reuters

With President Donald Trump's signing of the big tax-cut bill, the GOP snatched victory from the jaws of defeat. Suddenly, the political and economic landscapes have changed. The Republican party has turned the tables on the Democrats.

Trump and the GOP are on the side of the growth angels with the passage of powerful tax-cut legislation to boost business investment, wages, and take-home family pay. The Democrats, meanwhile, are left with stale class-warfare slogans about tax cuts for the rich.

Ironically, government unions, with their pension plans heavily invested in equity shares, will benefit hugely from the tax-cut-led stock market boom. They boo the GOP bill while they should be cheering.

But there's a lot of irony to go around. Unlike the pro-growth, tax-cut party of JFK, today's left-lurching Democrats root against economic growth, the stock market, and a powerful prosperity at home that lends strength abroad.

This is not a good place for Democrats to be.

If the supply-side business tax cuts perform as well as I believe they will, Trump and the GOP, with the stroke of a pen, will have greatly enhanced their outlook for the midterm elections.

One of the more incredible things about this story is the almost immediate support of large companies. Bank of America (BofA) announced $1,000 bonuses tied to the tax-cut bill, affecting 145,000 employees. And AT&T and Comcast announced $1,000 bonuses for more than 300,000 people combined, along with substantial new investments in the United States. Ditto for Boeing.

And more banks have joined the parade. Wells Fargo, PNC, BB&T, and Fifth Third are raising their minimum wages to $15 an hour.

And all this is tied to a massive corporate-tax-rate deduction from 35 to 21 percent. This is the most powerful growth measure in the plan. Trump called it "tax love" in a tweet.

At the old 35 percent rate, our companies took home 65 cents on the extra dollar. At the new 21 percent rate, they'll take home 79 cents. This enormous 21 percent incentive rewards new risk-taking, investment, a recycling of overseas profits to the U.S., and additional after-tax profitability.

Combined with 100 percent immediate cash write-offs for new investment, and the one-time repatriation of foreign-held earnings, this is the largest supply-side stimulus since 1986.

The result will be a business boom, where new capital formation and productivity increases the economy's potential to grow. This is counter-inflationary. And we can say goodbye to 1 to 2 percent secular stagnation and hello to 3 to 4 percent long-run prosperity.

And when you toss in lower marginal tax rates for individuals and the doubling of the standard deduction, you have even more potential for growth.

A recent Tax Foundation analysis from Scott Hodge notes that even the low-ball Joint Committee on Taxation agrees that the tax cuts pay for themselves. How? More GDP will be generated than revenues lost to the Treasury. For every $1 lost, the tax cuts produce roughly $1.90 in additional GDP.

Also from the Tax Foundation, the biggest tax-liability reductions come to the middle class. A single, $52,000 earner claims a 36 percent reduction in tax liabilities. A married, filing-jointly family making $85,000 gets a 20 percent tax-revenue reduction.

And a married, filing-jointly family earning $2 million only gets a 3 percent reduction in tax liabilities. So much for the tax-cuts-for-the-rich argument.

And let's not forget, inside the plan, there's drilling access to ANWR and repeal of the Obamacare individual mandate. And let's also not forget the Trump administration's massive reductions of burdensome business regulations.

At the end of the day, the success of the Trump tax cuts will not be decided by Democrat-leaning polls or highly flawed econometric models. The proof in this pudding will be in the eating.

With the supply-side model of lower marginal tax-rate incentives to work, save, and invest, plus significantly less tax avoidance and sheltering, the economy will move back to its normal, steady-state pattern of 3 to 4 percent growth.

Already, in the past two quarters, we're seeing a bump in business-equipment investment, producing better than 3 percent growth. The fourth quarter is likely to remain above 3 percent. The results of lower withholding rates, accompanied by higher income-bracket thresholds, will show up in February.

More take-home pay is always a winner. And businesses large and small are beginning to pull the investment trigger. Yes, the middle class will benefit. But everyone will profit from the first business boom in over 20 years.

JFK, Ronald Reagan, Jack Kemp, Art Laffer, and the rest of the supply-side clan — which now includes Donald Trump — believes that a rising tide lifts all boats.

So which is better: 1 to 2 percent stagnation or 3 to 4 percent prosperity?

Let the voters decide next year. But I'm taking the high ground.

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

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.