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November 30, 2017

Tax Reform, Population Growth Key to Fiscal Health

As Republicans work on tax cuts, we also take a look at the lack of recovery babies.

As Republicans in Congress this week seek to pass a tax reform bill — the most significant overhaul of the tax code since 1986 — it gives us an opportunity to have a broader discussion about our nation’s economic trajectory for the coming decades, and what factors will have the greatest impact on our long-term fiscal health.

To begin with, we must acknowledge tax reform as an absolute imperative for recovering from a lost decade in which Barack Obama became the first president in U.S. history to never achieve a single year of GDP growth of 3% or higher. While Obama certainly inherited an economic mess (as he incessantly reminded everyone), it was actually a mess of the Democrats’ own making. Furthermore, Obama compounded the problem with a combination of a vast expansion of federal spending, higher taxes on producers and anti-business policies.

The GOP’s tax reform proposes a $1.5 trillion tax cut, which seems huge until one considers this is from a CBO-projected $43 trillion in federal revenues over the next decade. While there are provisions that will certainly help individuals and families, the primary goal is to reduce corporate tax rates in order to make the U.S. a more attractive destination for foreign capital (including the trillions held overseas by U.S. multi-national corporations to avoid double-taxation), which in turn will create new businesses, thus new jobs, and thus higher wages as labor demand increases.

Of course, Democrats reflexively claim the GOP’s tax reform will be a disaster, discounting the benefits of pro-growth policies while lamenting an increase (so they claim) in the deficit. Their deficit concerns are grossly hypocritical considering they defended Obama as he racked up $10 trillion in new debt in just eight years while vastly expanding the size and scope of government.

It should also be noted that the CBO, because it uses “static” scoring, has historically missed the mark by a mile when projecting revenue growth from tax cuts. As noted in a recent Wall Street Journal editorial, eight months after the 2003 capital gains tax cut, the CBO projected capital gains revenue of $215 billion through 2007. The actual number was $377 billion, so we should take CBO projections and Democrat chicken-littling with a grain of salt.

The fact is the economy is in the midst of resurgence under President Donald Trump, who has restored confidence among consumers and businesses with his pro-growth, regulation-slashing policies, and his push for significant tax reform that would unleash business growth and job creation.

This is especially needed among working-class Americans, who saw manufacturing and retail jobs disappear under Obama, and who now must find work even as industries in their states rely more heavily on automation than ever before. Though overall unemployment rates have dropped most rapidly in “red” states, the workforce participation rate has ticked up. While some of that is due to retirement, enrolling in college, or other factors, some of that is also due to workers simply no longer looking for work.

There is one other factor, however, that is often overlooked, and that is population growth as reflected in fertility rates. In order for a nation to maintain a static population, it must have a “replacement rate” of 2.1 children per woman; below that, the population shrinks as the elderly die but the young have fewer babies. In established nations, there is a generally constant relationship between the economy and childbearing, rising and falling in tandem. Coming out of the Great Depression and WWII we saw a significant increase in childbirths. Conversely, during the Democrats’ “Great Recession,” childbearing rates dropped. Unfortunately, as the economy began to slowly recover, childbearing hasn’t kept pace.

This is a ticking economic time bomb because, as National Review’s Robert VerBruggen notes, “A society with fewer young people is a society with less innovation, less economic activity, and more stress on old-age programs.” VerBruggen identifies the two biggest causes of the drop as fewer unintended (mistimed) pregnancies, and young Americans delaying the onset of marriage and childbirth. And while the decline in teen pregnancies is a great thing, the delayed onset of marriage and childbirth is deeply concerning.

Social Security has been running deficits of tens of billions of dollars annually since 2010, with projected deficits in the trillions for the coming decades. Those projections will get worse as tens of millions of Baby Boomers continue to retire, no longer contributing taxes but drawing benefits. We have the same problem with Medicare, and it is only growing.

We are already witnessing the disastrous effect of population decline worldwide. The importing of millions of Middle Eastern and North African Muslim laborers into secular Europe, to make up for the lack of workers due to declining birthrates, has created a witch’s brew of cultural conflict and violence.

As bad, if not worse, is the case of Japan, where fertility rates have dropped to just 1.35. With a rapidly aging population and fewer children, Japan’s population is predicted to shrink by a staggering 30% by 2060, with half of that population being elderly. That is simply unsustainable.

Tax reform in America is desperately needed, and most welcomed. But our spending is out of control and must be reined in, and a cultural shift away from marriage and families will have dire effects on both the economy and government. It’s time for a national shift. The longer we wait, the more devastating the consequences.

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