Will Trump’s Tax Cuts Actually Grow the Economy?

Will Trump’s Tax Cuts Actually Grow the Economy?


The Republican sales pitch for the “Unified Framework” tax plan released last month has often relied on claims that slashing rates for corporations, combined with other elements of the plan, would spur economic growth — enough growth, some posit, that the tax cuts would ultimately pay for themselves.

Case in point: President Trump’s Council of Economic Advisers on Friday released a report predicting that cutting the corporate tax rate from 35 percent to 20 percent and introducing the immediate full expensing of capital investments would boost long-term GDP “by between 3 and 5 percent,” with the effects potentially kicking in as quickly as three to five years. “There will be additional GDP effects from reforms to individual income and pass-through business taxes, which we have not modeled, as well as growth from regulatory reform … and an infrastructure package,” the paper adds. And CEA Chairman Kevin Hassett reportedly expressed optimism Friday that the Trump budget and corporate tax cuts would generate enough growth to pay for all of the tax cuts being proposed.

Most economists scoff at such claims, and a new report by the Urban-Brookings Tax Policy Center finds that, even using a “dynamic” analysis that factors in economic feedback effects, the blueprint released last month would only boost growth for the first few years — and then lead to slower growth. The dynamic analysis also found that federal revenue would fall by $2.4 trillion over the next decade and by $3.4 trillion in the following 10 years, or about the same as under conventional scoring.

Of course, the projected economic effects depend on the model and inputs being used — don’t be surprised when you see some very different projections coming from the White House or congressional Republicans — but the Tax Policy Center did a second analysis using the Penn-Wharton Budget Model that similarly found that growth would increase slightly from 2018 through 2027 and then slow in the decade after that.

“While the Framework’s tax rate cuts would generate new economic activity at first, those growth effects would be washed out in a few years by the effects of higher budget deficits,” the Tax Policy Center’s Howard Gleckman explained in a blog post. “Because the federal government would have to borrow more to finance the tax cuts, less money would be available for private investment.”

Tax Policy Center - GDP tax changes macro feedback