Trump Tax Plan Will Intensify the Race Between Growth and Debt
The broad outlines of a bold tax plan the Trump administration presented Wednesday marked a step toward validating what stock markets have already priced in. Whether this tax reform can make it through Congress, and whether it evolves into the “historic” and meaningful accomplishment that the administration is targeting, will depend on its impact on overall economic prosperity.
Although not enough information has been released to allow for a proper assessment -- including details of the proposed measures and related funding plan and the specific legislative strategy -- here are eight early takeaways:
- There are two interrelated components to the tax plan: a reform of the tax regime, and a significant reduction in rates.
- The reform component targets simplification and transparency, both as standalone objectives and as means of reducing anti-growth impulses and reducing the risk of further capture by special interest.
- The tax reduction component seeks to increase work incentives for households and companies, as well as counter the multiyear worsening in inequality (both directly, by alleviating the tax burden of low- and middle-income earners, and indirectly by also helping to promote broad-based economic growth).
- The devil is very much in the design details and in the political implementation process.
- For now, we lack the detailed information to assess the extent to which the direct objectives will be met, let alone the broader ones. Moreover, proper design does not guarantee smooth political implementation.
- Any significant and sustainable tax plan -- and this one will be no exception -- involves both winners and losers. As such, it will attract a very large number of lobbyists, some of whom are major financial contributors to serving and aspiring lawmakers in Congress.
- While there is disagreement in the economics profession as to whether tax cuts are necessary to promote higher and more inclusive growth (with much depending on the assessment of the initial level of the tax rates and the set of exemptions and deductions), most economists agree that, by themselves, they are not sufficient to produce this outcome. For President Donald Trump's plan to succeed, its proper detailed design and technical and political implementation would need to be accompanied not just by progress on the other announced elements of his pro-growth economic policy approach (infrastructure and deregulation), but also by other measures that further promote labor productivity (including retooling and education reform).
- Finally, and most consequential for medium-term economic well-being, the administration’s tax plan will increase the stakes in the important race between growth and debt. And this is ultimately what will matter most for current and future generations. If growth were to win convincingly, Trump would take a big step in enhancing the prospects for “building durable American prosperity,” his oft-repeated goal. But if debt emerges the winner, it will take years, if not decades, to undo the harm.
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