Trump tax cuts rightly taxed labor more than capital

Thanks to corporate and estate tax rate cuts enacted by the Tax Cuts and Jobs Act, the effective tax rate on labor has surpassed that on capital for the very first time. Naturally, people who don’t understand high school economics are livid.

But this switch is a deliberate correction, not an unintended consequence.

For starters, the corporate tax rate reduction brought us to a globally competitive level, not substantially below it. The Tax Cuts and Jobs Act cut our corporate rate from 35% to 21%, almost the exact same rate as the European Union and just below the global average. This induced American corporations to repatriate $62.3 billion in foreign-earned profits the year after the rate went into effect, and foreign investment in the U.S. increased by nearly 9%. For businesses already here, stock buybacks have boosted economic growth, and businesses have hired their way to the lowest unemployment rate in half a century.

Reducing the estate tax — already a form of double taxation — similarly spurred investment, which in turn increases economic growth, as with nearly all reductions in taxes on capital.

Of the four factors of production — land, labor, capital, and entrepreneurship — only the latter two grow economies. Socialist economic theory, which subjects all four means to public ownership, tends to squelch the latter two, thus stagnating or cratering national economies.

From a purely Rawlsian perspective, if your normative objective is to increase the bottom line while maximizing overall shared wealth, then you want to maximize the utility of capital and entrepreneurship. That starts with reducing regulatory burdens and costs, including taxation.

Despite leading the moderate lane of the primary field, former Vice President Joe Biden’s proposed capital gains tax increase is wildly anti-growth. We should aim to phase out entitlements, boost government efficiency, and thus reduce our federal expenditures so we can cut taxes for investors and laborers alike. But this cut in taxes on capital is the right place to start in causing the economy, and thus federal revenue, to grow.