Will Trump's Tax Cuts Actually Grow the Economy?

This chart from the Council of Economic Advisers report shows the five-year stagnation of growth in labor productivity

The pace of capital services growth in the United States slowed substantially during the current business cycle expansion through 2016, with the centered 5-year moving average contribution of capital deepening to labor productivity dropping below zero in 2012 for the first time in modern history.

Under the assumption that USA workers would retain 30 percent of the 2016 profits of us firms earned overseas and not now repatriated, USA households could earn a raise of up to 1 percent, depending on the share of profits repatriated. Workers have not seen real wage increases because firms have been discouraged from investing in America by outdated tax policy and heavy regulation.

By the Council of Economic Advisers' calculations, such a reduction in the corporate tax rate would produce an annual increase of 3 percent to 5 percent in gross domestic product.

"Our report is only studying the corporate side of it, but the corporate side of it will lure capital back to the US, increase the amount of capital being paid there to support wage growth and move wages back to about $4,000 higher than baseline", Hassett said.

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.

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WASHINGTON | The U.S. economy expanded at a 3 percent annualized rate between July and September, advancing President Donald Trump's goal of faster economic growth and potentially providing a tail wind to Republican efforts to overhaul the tax code.

Returning to the "historic, long-run level of capital deepening" would boost employee productivity by 0.8 percent each year, the council's paper says. In the accounting for GDP, trade deficits subtract from growth. Other models show it could take twice that long, he said. "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. The report estimates the reduced rates for businesses could increase the size of the USA economy by $700 billion to $1.2 trillion over a decade, while causing average household income to eventually surge by $4,000 annually. It is the second white paper the CEA has released in recent weeks to make the case for cutting the corporate tax rate.

These estimated boosts to GDP from corporate rate reductions are consistent with estimates from other studies. "Eliminating full expensing of non-structure assets in year five, however, would reduce the long-run steady state increase in GDP to 3.1 percent".

The White House celebrated the news Friday that the US economy grew at 3 percent in the third quarter, the strongest showing since 2014, and predicted stronger growth to come.


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