Economists: Tax reform could cook up growth

But they differ on key ingredients to economic feast

As the tax reform discussion raged in Washington, D.C., in November, two well-known Maryland economists said some of the proposals could help spur the nation’s economy.

Anirban Basu
Phillip L. Swagel

But Phillip L. Swagel and Anirban Basu said they weren’t sure the ideas will make it into a final proposal, or whether a bill will pass at all.

“It’s still got a tough road ahead of it,” said Swagel, a professor in international economic policy at the University of Maryland’s School of Public Policy. “My guess is this gets no Democratic votes.”

Swagel was assistant secretary for economic policy at the Treasury Department during the last few years of George W. Bush’s administration. A critical piece of the equation, he said, is the Senate rule that’s part of the budget reconciliation process.

The rule allows Republicans to pass legislation with only 51 votes in the Senate.

The way the situation has been set up, he said, the tax bill can increase the deficit by only $1.5 trillion in the first 10 years.

“Any changes (to the original House and Senate proposals) will involve tradeoffs,” he said.

‘Most important part’

If given his way to reform taxes to spur growth, Swagel said he would allow companies to write off all of a capital investment in one swoop, rather than on a gradual depreciation schedule.

“To me, that’s the most important part of the tax cut for growth,” he said.

Some other provisions might have ripple effects, he added.

For example, one of the original proposals would eliminate the so-called “SALT” deduction for state and local taxes. That attracted opposition from politicians in relatively high tax states, such as New York.

“We’re not anywhere near New York, New Jersey or California,” Swagel said, but Maryland remains a relatively high tax state.

If the SALT deduction is eliminated, he said, that might spur competition among states. And higher-tax states might consider changing their policies to compete with lower-tax states.

“I’m not sure (how Maryland’s leaders would react),” he said. “It’s a pretty blue state.”

‘Secret sauce’

Basu sees a potential “big win for America” in the tax debate, but not in the proposals that are getting the most attention.

“I’d love to see a cut in the corporate income tax rate from 35 percent to something less than that. But that’s not really, I don’t think, the big win for America,” he said.

“The big win for America would be to try to bring some of this money that’s sitting abroad, multinational corporate profits sitting abroad that can’t get here in many ways because of that 35 percent corporate tax rate and so it just stays abroad, to lower that rate, but also to try to funnel as much of that money as is possible to public-private partnerships designed to fund infrastructure.”

The idea, he said, would be to collect tax money that is not being paid at all now. That revenue would go toward roads, bridges and other investments designed to spur growth.

“And this country really could, through private capital, rebuild its infrastructure without taking on really significant local government debt, state government debt or federal government debt. We’d make ourselves more productive in the process, we’d accelerate economic growth and, my goodness, that would be the secret sauce. But we’re not doing that right now. We’re focusing on other things. And so a lot of time is being wasted and the infrastructure continues to deteriorate.”