President Donald Trump’s plan to slash the corporate tax rate may not provide the sustained job growth that he and Republican leaders want, some economists say— that’s a point of longstanding and unsettled debate.
But in the short term, a lesser-noticed item in the nine-page framework that Trump and Congress produced Wednesday might provide a quick burst of growth that then dwindles, said economist Alan Viard of the nonpartisan American Enterprise Institute. He compared it to a “sugar high.”
Republicans propose to temporarily turbocharge the tax savings corporations can get when they spend heavily on major items like new equipment. Letting companies immediately deduct the full cost of such purchases from their taxable income would help spur more purchasing, more growth and more hiring, Viard said—at least for a while.
The result would be “a short spike in hiring and growth that would soon peter out,” he said.
Trump and the GOP have promised growth that’s far more robust—a sustained 3 percent growth rate. Their sales pitch for what Trump called “a revolutionary change” in business taxes boils down to one word: jobs. “We are going to bring back the jobs and wealth that have left our country—and most people thought left our country for good,” Trump told an eager crowd in Indianapolis Wednesday.
The tax framework’s prescription for growth involves a hefty dose of rate reduction: Corporations would pay 20 percent, down from the current 35 percent. And businesses organized as partnerships, limited liability companies and sole proprietorships would pay 25 percent, down from rates as high as 39.6 percent.
The argument that tax cuts fuel hiring and growth has its intellectual roots in the supply-side tax cuts of former President Ronald Reagan’s era—an allusion Trump eagerly made during his Indianapolis speech. But among economists, the jury is out on whether cuts lead to jobs.
Mixed Results
The tax overhaul that Reagan presided over in 1986 was followed by a major expansion, but former President George W. Bush’s tax cuts in 2001 and 2003 preceded years of comparatively anemic growth. Meanwhile, former President Bill Clinton’s 1993 tax increases were followed by a boom.
So the tax-cuts-produce-growth argument “is not yet settled,” said William Gale, a former senior economist to former President George H.W. Bush. A widely cited 2012 survey by the University of Chicago’s Booth School of Business found an even split among economists on the question.
Enter the tax break for equipment purchases and other so-called “capital spending.” Current law already allows companies to recover the costs of such purchases—but only over years through depreciation. The Republican plan would allow them to do it in one fell swoop—in the same year that they made the purchase.
The framework suggests that the accelerated tax break would only be available for a limited time—perhaps as little as five years. That would give companies an incentive to buy now and “may provide a little bit of an extra boost in the short run,” said economist Donald Marron, the director of economic policy initiatives at the Urban Institute.
“But then it goes away,” he said.
Pull Forward
There is good news for Trump and the Republican Congress: A short-term economic jolt might help make congressional elections next year smoother for them.
In effect, making the deduction temporary would “pull forward” companies’ future purchases and “juice economic activity in the front, during this term leading into re-election,” said Michael Drury, the chief economist of McVean Trading & Investments in Memphis.
Grover Norquist, the president and founder of the conservative group Americans for Tax Reform, says he thinks the tax plan would produce sustained growth. But he acknowledged the issue’s political importance.
“This tax bill, and its growth, is going to be the central piece of legislation that voters will vote on in October and November of 2018,” Norquist said earlier this week.
Perhaps with quick results in mind, the tax framework that Republicans released Wednesday—which largely stuck to broad themes and general terms—got very specific regarding the equipment-purchase deduction.
It’ll apply to purchases “made after September 27, 2017,” the framework said. That was Wednesday.
