Tax reform has been at the top of the agenda for both President Trump and Congressional Republicans in recent months. The Senate version of the tax bill passed a major hurdle when the Senate Budget Committee approved the bill Tuesday afternoon, setting it up for a full Senate floor vote. Now the scramble to ensure the bill has enough votes continues, but assuming it does pass, what could that mean for the economy in real terms?
With a floor vote for the Senate tax bill possibly happening before the end of the week, the American Enterprise Institute (AEI) asked three of its resident tax experts to weigh in on just how much tax reform could transform the American economy.
Alan Viard is a resident scholar at AEI, where he studies federal tax and budget policy. Viard says claims by supporters of the bill that it could increase the annual growth rate of the economy by 4 percent or more are “misplaced and exaggerated.” However, he does agree that a “well-designed” tax reform plan could have real benefits for the economy. He explains that trying to predict a specific growth rate isn’t the right approach, as it doesn’t address the incremental effects of tax reform. “[Gross domestic product (GDP)] growth at a 3 percent annual rate after tax reform was adopted would mark an achievement if the growth rate would have been 2.5 percent without the reform, but not if the growth rate would otherwise have been 3.5 percent,” Viard said. “With or without tax reform, economic growth will be affected by numerous unrelated factors that are hard to predict.”
Viard also suggests tax reform would likely not have a permanent effect on the growth rate of the GDP. “Instead, a well-designed tax reform would permanently raise the level of GDP by temporarily increasing its growth rate,” Viard said. Based on estimates from the Tax Foundation, Viard posits a scenario where “if baseline GDP growth was 1.8 percent per year, tax reform could boost the growth rate to 2.15 percent per year for a decade, with growth returning to its 1.8 percent pace thereafter.”
AEI resident fellow Alex Brill “studies the impact of tax policy on the US economy as well as the fiscal, economic, and political consequences of tax, budget, health care, retirement security, and trade policies.” Brill says that the current U.S. tax code “imposes drag on U.S. economic growth” and believes a modified code could increase capital stock, boost worker productivity, and increase wages. However, all of these changes would take time.
“To promote growth, tax reform should be constructed in a manner that does not lead to excessive crowding out of private investment with new public borrowing,” Brill said.
If done effectively, Brill believes tax reform could “add multiple tenths of a percentage point to the real GDP growth rate for a decade or more until the transition to a new, higher level of output is reached.” After that transition, Brill theorizes that U.S. economic output could be “more than $1 trillion higher every year thereafter.”
To read more of AEI’s online symposium on the effects of tax reform, including the thoughts of AEI resident scholar Stan Veuger, click here.