Larry Kudlow, the Reagan administration economist who also advised the Trump campaign, said raising taxes on high earners will discourage investment and hurt the economy.
Kudlow spoke on CNBC as House Republicans prepare to release a bill tomorrow, setting off public debate and likely political squabbles. President Trump and Republican leaders want to cut the corporate tax, eliminate estate taxes and approximately double the standard deduction for all taxpayers.
While the Tax Policy Center said those cuts will overwhelmingly benefit the wealthiest, Kudlow said they are necessary to boost economic growth to 3 percent or more.
“If the Republican party raises the top income tax rate, a lot of us are going to be very unhappy,” Kudlow said on business channel CNBC. “At the highest end, you’re talking about people that invest, successful people. We don’t punish success, supposedly. Mr. Trump’s trying to end the war on success.”
The Republican plan is likely to include changes to tax brackets, which indicate the tax rate on the highest dollar of taxable income. The IRS currently has a system of seven tax brackets set up for 2018, but that likely will change if Republicans can get their plan signed into law.
“The three brackets they’re talking about -- 12, 25 and 35 – is sort of the baseline right now. A fourth bracket could be let’s say 37 or 38. I don’t like that,” Kudlow said. “If you drive that up to 44 percent … you are going to hurt the economy, you are going to hurt investment. These are the people who invest their earnings, invest their winnings.’
Kudlow last week said he’s worried that the House of Representatives wasn’t estimating how fast the U.S. economy will grow if taxes are cut.
The lower growth forecast may mean lawmakers won’t approve some cuts, such as for corporate tax rate.
“I’m hearing, for example, they may not use a 3 percent growth baseline, which is worth several trillion dollars,” Kudlow said on financial news channel CNBC. “That they will use a Joint Tax Committee baseline which means no dynamic scoring – will cost them a fortune. The only way they can get this done is a 3 percent growth path, the mother of pay-for’s.” Dynamic scoring is a tool to give members of Congress the information they need to evaluate the tradeoffs in tax policy changes.
Kudlow said political cycles make the tax cut very viable during President Donald Trump’s administration. As a candidate, Trump pledged to cut taxes, reduce burdensome regulation and to spend a trillion dollars on roads, bridges and airports.
The first estimate of third-quarter GDP showed that the 3 percent target has been reached for two quarters in a row, even though the Republican-controlled Congress has yet to approve tax or healthcare reforms. It’s the promise of those reforms that may be helping to drive momentum.
The third quarter growth number of 3 percent, beating the consensus estimate of 2.5 percent, follows 3.1 percent growth in the second quarter, making for the best back-to-back quarters since 2014 and ending a long streak of sluggish 2 percent growth. Hurricanes Harvey and Irma in September didn’t hurt the U.S. economy as much as some economists had predicted.
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