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Rosy White House tax cut forecast clashes with independent analysis

By David Morgan and Saqib Iqbal Ahmed

 

U.S. President Donald Trump displays a presidential public health emergency declaration on the nation's opioid crisis in the East Room of the White House in Washington, U.S., October 26, 2017. REUTERS/Kevin Lamarque

 

WASHINGTON/NEW YORK (Reuters) - The White House promoted President Donald Trump's tax cut plan on Friday with a forecast of faster U.S. economic expansion and wage growth, as independent analysts said the plan would swell the budget deficit and provide little spark to the economy.

 

The rival projections reflected the many unknowns swirling around the plan, expected to be unveiled in legislative form on Wednesday. Republicans were still undecided on some of the hardest parts, such as how to pay for the costly cuts proposed.

 

Weeks and possibly months of debate lie ahead for a project that Trump promised to tackle in his 2016 election campaign. In September, he unveiled a rough framework for cutting taxes. Now he wants Congress to approve a bill, which would mark his first major legislative victory, before the end of the year.

 

The Trump plan for tax cuts of the sort normally reserved for times of economic recession is taking shape in Congress amid signs the economy is already growing briskly.

 

Gross domestic product increased at a 3 percent annual rate in the July-September period, supported by strong business spending on equipment, the Commerce Department said on Friday.

 

The economic recovery begun under former President Barack Obama after the 2007-2009 recession is in its eighth year and showing little signs of fatigue amid a tightening labor market.

 

"It’s hard to say that we need to have tax cuts at the individual level ... you don’t need to provide further fiscal stimulus when the economy is already strong," said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, New Jersey.

 

Faced with improving economic prospects, Republicans have shifted their rhetoric on tax cuts away from getting the economy moving again to keeping it on an expansion track.

 

An analysis released by White House economic adviser Kevin Hassett said slashing the top federal corporate tax rate and letting businesses write off the full cost of most capital investments immediately, as proposed in the plan, would bring faster growth and higher wages.

 

Hassett's projections envisioned a 3 percent to 5 percent increase in GDP that, over 10 years, could represent an additional $700 billion to $1.2 trillion in economic output.

 

But the Tax Policy Center, a nonprofit Washington think tank, released an analysis that concluded the Trump tax plan would not produce a significant, permanent economic boost.

 

The group said the plan would reduce federal tax revenue by roughly $2.4 trillion over the next decade and by over $3 trillion in the decade after that, adding significantly to a U.S. national debt that already exceeds $20.4 trillion.

 

The center said Trump's tax cuts would drive new activity at first, but that the impact would be blunted in later years by rising deficits, forcing more federal borrowing to finance the tax cuts and driving up borrowing costs for the private sector.

 

Hassett told reporters he does not expect tax reform to add significantly to the deficit. But he conceded that it would become "a big negative" if economic growth failed to materialize and the debt level soared.

 

The framework of Trump's plan unveiled last month called for reducing the corporate tax rate to 20 percent from 35 percent, the small business rate to 25 percent from up to 39.6 percent and the top individual rate to 35 percent from 39.6 percent.

 

It also called specifically for repealing the estate tax on inheritances and the alternative minimum tax, both of which are typically paid by the country's highest-income earners.

 

Less clear were the plan's proposals to reduce the number of tax brackets, enhance the child tax credit and possibly put new limits on popular 401(k) retirement pension plans.

 

Because details of the unfinished tax legislation are unknown, its economic impact is unclear, said Omer Eisner, chief market analyst at Commonwealth Foreign Exchange in Washington.

 

Hours after the Commerce Department reported stronger-than-expected third quarter U.S. economic growth of 3 percent. Hassett said the data did not undercut the need for tax cuts.

 

He said economic expansion and stronger stock market performance could be undermined if the Republican-controlled Congress fails to enact the tax cuts.

 

"Firms are optimistic both because of regulatory reform but also because they expect corporate tax reform and overall tax reform," Hassett said.

"The thing that I'm worried about is that if those expectations prove to be incorrect, then I would expect business capital spending to go back to a disappointing path and equity markets to decline as well."

 

Kevin Brady, chairman of the U.S. House of Representatives tax committee, said progress was being made toward satisfying Republicans who have held back support for the tax plan because it could end a deduction for state and local taxes. "I'm hopeful ... we can find a good solution for them," Brady said.

 

 

-- © Copyright Reuters 2017-10-28

[stevenl]

Tax reform is necessary. But in the present form there seem to be many more negatives than positives.

[Samui Bodoh]

I think it is sad what has happened to the Republican party regarding tax cuts. 

 

Tax cuts, as a tool of economic policy, are a great thing to do WHEN THE TAX RATES ARE TOO HIGH. Unfortunately, the Republican party has forgotten that little caveat on the end that is the key to the whole policy. Nowadays, it seems like Republicans believe that tax cuts are the be all and end all to any situation. Hit by a car? Cut taxes! Hurricane swamped your city? Cut taxes! Teenage daughter pregnant? Cut taxes!

 

There is a good argument that when the economy is in need of stimulation, tax cuts can provide a boost, but it is debatable whether that situation is occurring. 3% growth in a developed economy is nothing to sneeze at, would cutting taxes enhance that much? And at what cost?

 

"At what cost?". That is the key question. The US has a high debt and cutting taxes without paying for them is a recipe for disaster. What has happened to all those Republicans who for years and years and years and years have been saying that the US needs to get its debt under control? 

 

Cowards and hypocrites!

 

C'mon, US, get your act together... You are being led by a snake oil salesman and shooting yourself in the crotch.

 

 

[keith101]

This is a man who sent Casinos (multiple money making machines ) bankrupt so what would he know about the finances of a country except to make the 1% even richer by screwing over the rest of the country its obvious the Republican party is all about themselves and not the citizens of the US

[Emster23]

Please refrain from calling it "tax reform". Call it a tax give away for the rich on the backs of everyone else. "Ya dance with the one what brung ya"

[Bill Miller]

Same old same old "Pennies from heaven" that has been the stock in trade, and miserable failure, of every Republican administration since Reagan thirty years ago.
"Supply side" economics via tax cuts at the top simply do not work. Ever.