Economists agree: Tax reform will bring substantial economic growth

Estimate growth of 30 basis points

A group of top U.S. economists sent a letter earlier this week to U.S. Department of the Treasury Secretary Steven Mnuchin, claiming the tax reform bills being considered in the Senate will significantly boost the economy.

These economists, who range from Harvard University and other professors to a former director of the Congressional Budget Office and economists who served under former President George W. Bush, said that reducing the corporate tax rates will increase economic activity.

“Expensing, which allows firms to deduct the full cost of investment at the time it is made, lowers the user cost of capital relative to depreciation over time,” the economists wrote in their letter. “A lower corporate tax rate also lowers the user cost of capital, which not only induces U.S. firms to invest more, but also makes it more attractive for both U.S. and foreign multinational corporations to locate investment in the United States.”

The Senate version of the Republicans’ tax plan, the Tax Cuts and Jobs Act, moved one step closer to becoming a reality on Tuesday when the Senate Budget Committee approved the bill.

And earlier in November, House of Representatives passed its major tax reform, sending it to the Senate, but the housing industry is not happy about the decision.

The economists explained that if capital stock was increased over ten years, it could bring the nation’s gross domestic product up to 4%, satisfying President Donald Trump’s campaign promise.

“A conventional approach to economic modeling suggests that such an increase in the capital stock would raise the level of GDP in the long run by just over 4%,” the economists wrote. “If achieved over a decade, the associated increase in the annual rate of GDP growth would be about 0.4% per year.”

When Trump took office, one of his promises was to create 25 million new American jobs and bring gross domestic product growth up to 4% annually. Now, experts are beginning to examine if the president is on track to meet that 4% mark.

The latest report from the Bureau of Economic Analysis shows GDP increased to 3.3% in the second quarter – the highest growth in three years.

“We are very encouraged that findings by this preeminent group of economists supports our strong belief that the tax reform proposals before Congress will lead to substantial economic growth,” Mnuchin said.

But while economists are backing up the tax reform plans currently being considered in the Senate, housing experts explained the House’s bill could cause inventory shortages in many cities and be especially hard on areas such as California where home prices are higher.

The House version would slash the mortgage interest deduction in half from $1 million to $500,000 while the Senate’s bill would keep MID intact, but double the standard deduction. However, Speaker of the House Paul Ryan claims the bill would enable homeownership by giving a tax cut to most middle-income families.

The Senate is expected to vote on tax reform soon, sending its version to the House for a vote if it passes.

The letter’s signers are:  

  • Robert J. Barro, Paul M. Warburg Professor of Economics, Harvard University
  • Michael J. Boskin, Tully M. Friedman Professor of Economics, Stanford University; Chairman of the Council of Economic Advisers under President George H.W. Bush
  • John Cogan, Leonard and Shirley Ely Senior Fellow, Hoover Institution, Stanford University; Deputy Director of the Office of Management and Budget under President Ronald Reagan
  • Douglas Holtz-Eakin, President, American Action Forum, former director of the Congressional Budget Office
  • Glenn Hubbard, Dean and Russell L. Carson Professor of Finance and Economics (Graduate School of Business) and Professor of Economics (Arts and Sciences), Columbia University; Chairman of the Council of Economic Advisers under President George W. Bush
  • Lawrence B. Lindsey, President and Chief Executive Officer, The Lindsey Group; Director of the National Economic Council under President George W. Bush
  • Harvey S. Rosen, John L. Weinberg Professor of Economics and Business Policy, Princeton University; Chairman of the Council of Economic Advisers under President George W. Bush
  • George P. Shultz, Thomas W. and Susan B. Ford Distinguished Fellow, Hoover Institution, Stanford University; Secretary of State under President Ronald Reagan; Secretary of the Treasury under President Richard Nixon
  • John B. Taylor, Mary and Robert Raymond Professor of Economics, Stanford University; Undersecretary of the Treasury for International Affairs under President George W. Bush

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