After the breakdown of health-care reform, both President Donald Trump and the Republican Congress need a 'w' – otherwise known as a win.
And not just any win, but one that will play into the public's demand for faster economic growth, better jobs, and higher wages. Recent polls show the nexus of growth, jobs, and tax cuts vastly outranks health care.
So, most importantly, it's really middle-class wage earners that need a 'w'.
We've had job creation, but it hasn't reached all sectors of the population. Consequently, the employment-to-population ratio remains historically low. So does real economic growth.
From 1950 to 2000, growth averaged 3.5 percent a year. During the Obama recovery –and frankly going back to the year 2000 – growth has hovered at around only 2 percent per year. Real wages have barely improved, but new business startups have actually declined while productivity has flattened.
The hole in the center of this tepid growth story is a lack of business investment. It's the missing ingredient. From 1950 to 2000, total business fixed investment averaged a strong 5.3 percent annual growth. But since 2000, that figure has dropped to only 1.7 percent.
For 50 years, the capital-labor (K/L) ratio increased by an average 3 percent a year. The capital stock rose 4.3 percent per year. But since 2009, the K/L ratio has fallen by 0.2 percent per year, and the capital stock has grown by only 1.5 percent annually.
This is why productivity and wage gains have been minimal, and the root cause is the lack of business investment.
Still, the GOP can remedy this by providing new tax incentives (including a rollback of costly regulations) right now. Specifically, the new Republican priority should be business tax cuts first.
While health-care reform simmers on the back burner, the president should go right to business tax reform. It can be nice and simple and easy to understand. There's virtually a bipartisan consensus for it. Separate it from the broader and far more complex and controversial issues related to individual tax reform.
Put business taxes first
Yes, we desperately need personal tax simplification. We also need lower tax rates across-the-board. We need to clamp down on loopholes and unnecessary crony-capitalist deductions to broaden the tax base. Yet that's a much more difficult and longer battle. Save it for next year.
There are hundreds of tax lawyers in Washington who can separate business income from personal income. That will allow legislation to reduce tax rates for the small "S-Corp" companies, as well as limited-liability partnerships and proprietorships.