Trump Tax Reform Won’t Goose Growth

President Trump’s proposed budget justifies its potential $1.5 trillion increase in the Federal deficit over ten years by claiming it will increase the anemic U.S. growth rate (thereby paying for itself). There can after the third quarter figures released Friday be no question that the U.S. economic growth rate has increased under Trump, with his deregulation (or simply ceasing to pile on additional regulation) the main spur to boosting an economy that had been burdened with non-market interest rates and silly leftist regulatory theories. But Trump’s proposed tax changes are a different matter; they are by no means clearly supply-side in their likely effect, and thus may simply deprive the Federal government of much-needed revenue.

To get a significantly increased growth rate from a tax change, it is necessary that it have a positive supply-side effect. A flat tax cut of $500 per citizen has no supply side effect because everybody’s return from a marginal hour of extra work is unaltered by it. It affects only the demand side, by increasing consumption (and has a corresponding dampening effect from the addition to the budget deficit it causes). By and large, Keynesian multipliers by which a tax cut or spending boost produce knock-on effects on overall output are very small and may even be negative when the additional government borrowing is taken into account.

The supply side paradigm can also be applied to corporate tax cuts, but here the incentive effects are generally more complex, since an increase in corporate net income may simply raise share prices, without generating any extra enthusiasm for domestic capital spending, let alone increasing the wages of the workforce.

To begin with the proposed corporate tax changes, Trump proposes to cut the tax rate to 20% from the current 35%, but make up some of the revenue loss with a low rate of tax on international earnings and accumulated assets. This will make a gigantic hole in the budget, though the one-off tax revenue may postpone fiscal disaster for a year or two. Trump’s proposed corporate tax structure is certainly better than the alternative proposed by Chamber of Commerce types – making tax truly territorial, thereby making all non-U.S. earnings tax-free if they can be routed through tax havens. That’s an obvious strategy for economic disaster for the United States, if not for Third World countries to which investment is re-directed.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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