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- A new report from President Donald Trump’s Council of Economic Advisers estimated the effects on economic growth from a proposed corporate tax rate cut.
- The CEA report said just a corporate rate cut would boost GDP growth to an annual rate of 3% to 5%.
- While economists agree that the tax cut would boost the economy, most predict a smaller economic boost.
An analysis from President Donald Trump’s Council of Economic Advisers published Friday estimated that one key element of the Republican proposal to overhaul the tax code would create a near-historic shot in the arm for the US economy.
According to the analysis from CEA chair Kevin Hassett and staff, slicing the corporate rate to 20% from the current federal rate of 35% would boost US GDP growth to an annual rate between 3% to 5% over the long-term.
That would boost GDP growth to a level not seen in decades. US annual GDP growth has not hit 5% since it grew 7.4% in 1984, and annual GDP has only topped 4.5% three times since 1980. The average annual GDP growth rate since the end of World War II in 1947 is 3.1%.
Despite the virtually unprecedented nature of the boost, the CEA analysis suggested the route to increased growth from a corporate tax cut would be fairly straightforward.
From the analysis:
“A decrease in the tax rate on corporate profits, along with expensing of investment, decreases the before-tax rate of return used to assess the profitability of an investment project, thereby increasing firms’ investment, desired capital stock, and potential output. Likewise, by lowering the user cost of capital and making more investments profitable, multinational corporations and foreign capital can be attracted to invest in the US economy.”
In other words: By lowering the corporate rate, companies will have more money to spend on investments like equipment and wages, boosting the economy, the analysis argued. It also projected some growth from companies bringing operations back from overseas.
While most economists agree that the CEA is directionally right — lower corporate tax rates would lead to an economic boost in the short term — the size of the growth flies in the face of most independent projections. Most economists think the boost to the economy would be well under a full percentage point, leaving the US short of Trump’s promised 4% growth.
Matthew Luzzetti and Brett Ryan, senior economists at Deutsche Bank, estimated that a full corporate tax cut along with an individual rate cut would boost GDP growth by 0.3 percentage points in 2018 and 0.4 points in 2019 above the Federal Reserve’s current growth baseline. That wouldn’t even push GDP growth to the 3% level.
Other Wall Street banks estimate similar effects. Goldman Sachs pegs additional growth from the tax cuts at just 0.1 to 0.2 percentage pointsover the next two years. Barclays analyst Shawn Golhar told Politico that if the full tax plan gets through, there would only be a o.5-point boost in 2018.
The CEA also suggested that other factors, like the proposed individual tax rate reduction and repatriation tax, could boost the economic growth expectations from the plan. But other factors, including Trump’s own policies, could also lower the growth rate. Changes in immigration rates, the Federal Reserve’s rate reaction, and long-term demographic trends could all produce headwinds to growth.
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