Will Trump’s Tax Cuts Spur Growth? Few Economists Think So

This article first appeared on the American Enterprise Institute site.

It looks almost certain the GOP tax bill will pass Congress, to be then signed by President Trump.

So here’s a question or two or three: How will we judge whether it worked? What are the expectations? What will be the standards?

Now, generally Republican politicians and pundits have been more optimistic than most mainstream economists about the growth impact.

For instance, the IGM Forum Economic Experts Panel found that only one out of 42 economists surveyed agreed with this statement: “If the US enacts a tax bill similar to those currently moving through the House and Senate — and assuming no other changes in tax or spending policy — US GDP will be substantially higher a decade from now than under the status quo.”

Indeed, most private sector models don’t show a whole lot of growth, certainly not the 0.4 percent increase to annual growth rates that many Republicans are touting. From the Committee for a Responsible Federal Budget:

4pt growth fig 1_0 Tax Policy Center (TPC), Penn Wharton Budget Model (PWBM), CRFB Calculations. Tax Foundation estimated original Senate bill would improve growth by 0.36 points though we estimate various expirations would reduce this by roughly 0.1 percentage points.

And here is what Goldman Sachs is looking for:

We expect the legislation to boost growth by around 0.3pp in 2018 and 2019.

This is based mainly on the Senate version of the bill, which delays the corporate income tax cut to 2019 but includes a tax cut for individuals (including pass-through income) of around 0.6 percent of GDP in 2018, slightly greater than what we had previously penciled in. . . .

We note that the effect in 2020 and beyond looks minimal and could actually be slightly negative, as the JCT estimates suggest that the tax cut that year would actually be slightly smaller than in 2019.

If you think the economy’s baseline growth is around 2 percent, then these gains really don’t get you anywhere close to 3 percent or higher sustained growth.

(Goldman, by the way, is looking for GDP growth of 2.5 percent, 1.8 percent, 1.5 percent, and 1.3 percent over the next four years.) But sustained 3 percent growth is what many GOP supply-siders are expecting.

GettyImages-883692256 Senator Susan Collins (R-ME) (C) at the Capitol, December 1, 2017 in Washington, DC. Alex Wong/Getty

Every Saturday, I am on Larry Kudlow’s radio show. Here is what Kudlow said when I asked him how he would judge the tax plan’s impact:

First of all,  2.3 percent growth I would regard as a great disappointment.

Secondly, if we don’t pick up business investment spending and capital formation, business investment spending and real wages and productivity: If all that stuff remains flat more or less like it has for the past 17 years, I will regard that as a great disappointment. . . .

[But] give us our chance . . . and let’s see if this supply-side tax plan — on the business side particularly, mostly — let’s see if it works. Give us a chance, give us a couple years, and if it doesn’t work, and I am being very honest here, then we are all going to have to go back to the drawing board and maybe in a bipartisan way take another look at that. . . .

I believe firmly that we are going to have an investment boom with tremendous knock-on, spillover effects. I really do. . . . But if we’re down around the low twos in GDP, it won’t work, it’s not going to work. . . . I will say how disappointed I am, absolutely. . . .

I am out there and Steve Moore is out there, we’re looking at three to four percent growth along with the productivity and wage gains and so forth.

So 3 percent or bust!

Now would sure be a great time for a long-awaited productivity boom to kick in.

James Pethokoukis is a columnist and blogger at the American Enterprise Institute.

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