- 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 by 3% to 5% a year.
- 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 by 3% to 5% a year over the long-term.
“On the basis of these studies, we have calculated that a reduction in the statutory Federal corporate income tax rate from 35 percent to 20 percent simultaneously with the introduction of immediate full expensing of capital investment would generate an increase in GDP of between 3 and 5 percent in the long run,” said the report’s conclusion.
Despite the big 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.
The Trump administration and the CEA have made many large projections about the economic impact of the tax plan. Chief among them is that the tax plan will push US economic growth above 3% sustained GDP growth like Trump has promised.
While most economists agree the Trump administration is directionally right — lower corporate tax rates would lead to an economic boost in the short term — the size of the growth is larger than most independent projections.
Additionally, other reports from the CEA — such as a previous report that estimated the average US worker would receive a wage increase of $4,000 a year from the tax plan — have been met with skepticism.
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.