Where’s The Economic Growth?
by Jerry Jasinowski
President Trump is so proud of his bright, shiny new tax bill. He couldn’t be even more proud if he knew what was in it.
This bill is essentially a tax cut; it does not rise to the level of fundamental reform of the system which remains pretty much intact. However, in fairness it must be said that there are several provisions that should be beneficial to the economy and (especially) the stock market. For example, the cut in corporate tax rates was long overdue and should encourage more small business and entrepreneurship.
But the legislation is hugely deficient in terms of promoting a higher level of economic growth. Most of the corporate tax cuts will go for dividend increases and stock buybacks; it will not do much to stimulate new capital spending or job creation. Goldman Sachs estimates a modest impact of 0.3 percent on GDP growth in 2018 and 2019.
Worse yet, the tax bill will not begin to pay for itself. Most likely it will, in fact, increase the national debt by $1.5 trillion over 10 years. Take out the inevitable “gimmicks” in the bill and the true shortfall is knocking on $2 trillion. That means the ratio of debt to the GDP will rise to 250 percent within 10 years, one of the highest levels in history. At that level, interest on the debt will be consuming a huge and growing share of the annual budget, leaving little left to fund entitlement programs and discretionary spending – such as for national defense. This trend line is simply not sustainable.
Yet another conspicuous flaw in the legislation is its bias to business that does little to reduce the tax bite on lower income workers. In fact, some middle class income taxes will increase while business taxes decline. I am a pro-business guy, but I know of no evidence that we can stimulate growth by shifting wealth from low and middle income workers to business owners. The economy simply does not work that way.
Further, it makes no sense to increase the budget deficit when the economy is close to full employment. More likely, this will stimulate inflation and encourage the Federal Reserve to hike interest rates even more rapidly. Higher interest rates will discourage investment and growth.
In the final analysis, the entire thrust of this tax bill is a political effort to prove the Republicans can accomplish something, anything. But the reality is that this bill fails to significantly increase economic growth, explodes the federal deficit, and rewards the wealthy rather than the middle income tax payers. At the same time, the bill does not simplify the tax code but rather creates a whole new basket of tax gimmicks to create more opportunities for tax lawyers. Further, given that the bill is a partisan Republican effort, just like Obamacare, this is a legislative debacle that will haunt the Republican Party for years to come.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. December 2017