2018-08-08 / Editorial

Reducing taxes and increasing take-home pay help all

I’d have structured it a bit differently and combined it with budget cuts. But even as is, the federal tax reform enacted by Congress and signed by President Trump will enhance economic growth for the nation as a whole, and for North Carolina especially.

Slashing America’s relatively high taxes on corporate income will encourage more domestic investment, business starts, business expansions and employment. Reforming and reducing the personal income tax will also boost job creation and takehome pay.

Naturally, Democratic and progressive opponents of tax reform disagree about the net effects. They believe federal expenditures are, on balance, more helpful to the economy than private expenditures, and would rather keep taxes higher to finance the former at the expense of the latter.

They’re mistaken. While public investment is a real thing, most of the federal budget is devoted to subsidizing consumption — either as cash-transfer payments from one set of taxpayers to another or as vendor payments to medical providers for Medicare and Medicaid. Federal spending on physical capital (infrastructure) and human capital (education and training) is a small fraction of the total.

Redistributing income nor subsidizing medical consumption for nonworkers increases the productive capacity of the economy. Both may be worth doing for other reasons, but they don’t expand the pie. They change the way it’s sliced.

Investment is about baking larger pies. Most productive investment occurs in the private sector. To the extent high taxes (and heavy regulations) discourage new companies from starting or existing companies from adding plants, equipment, locations and employees, they inhibit growth. Reducing such impediments enhances growth.

How much direct and indirect benefit can North Carolinians expect from federal tax reform? Two Washington-based think tanks, the Tax Foundation and the Heritage Foundation, recently crunched some numbers.

On employment, the Tax Foundation projects the U.S. will create about 1.4 million more full-timeequivalent jobs over the next decade than would have occurred under the old federal tax rates. About 37,000 of those net new jobs will be in North Carolina, according to this estimation model.

The Heritage Foundation’s model examines a different issue: how tax reform will affect takehome pay. It estimates that the average North Carolinian saved about $1,054 this year, representing a 12 percent decrease in federal tax liability, with larger average savings for married North Carolinians with two children ($1,913 per couple, a tax cut of 14 percent).

If the tax savings are added up over the coming decade, the Heritage model projects an average increase in North Carolinians’ take-home pay of $18,287 across all tax-filing households and $31,608 for married couples with two kids.

If both sets of numbers seem welcome but not exactly earth-shattering, I commend you for paying attention and exercising good judgment. Conservatives who properly view private action as the primary driver of growth and progress should recognize but not exaggerate the extent to which government affects private action. Even shackled to an overly large public sector, private enterprise delivers the goods (and services). Removing those shackles is wise. Expecting miraculous consequences is not.

Still, tens of thousands of new jobs and major gains in take-home pay for North Carolinians deserve commendation. They represent increases in both economic well-being and personal freedom. To sustain them, however, Congress and the Trump administration must turn their attention to the other side of the ledger, to spending.

Federal deficits are soaring. And even if the current budget were balanced, the long-term cost of the federal welfare state vastly exceeds the revenues produced by either the previous tax rates or the current ones. In my view, we will need to control spending in virtually every department and agency of the federal government — eliminating some programs and applying strict income tests to others, including Social Security and Medicare, so that they become more explicit safety nets rather than notionally universal entitlements.

North Carolinians are unwilling to pay for all the federal, state and local government that progressives want to “give” them. Time to reconcile the balances.

John Hood is chairman of the John Locke Foundation. Follow him @JohnHoodNC.

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