Tax plan packs punch but could bruise the economy
Experts: U. S. would be strained over long term
The Republican tax- cut package unveiled Thursday would give the U. S. economy a big sugar- high next year. But the inevitable comedown is likely to follow, economists say.
By reducing taxes for households and businesses, the reform would boost consumer spending and business investment in the short term, lifting growth. But with the economy at full employment, it also would strain its capacity to respond to the surge in activity, stoking faster wage growth and inflation. That will lead the Federal Reserve to raise interest rates faster, discouraging home purchases and consumer and business borrowing, said Mark Zandi, chief economist at Moody’s Analytics.
Interest rates also would rise because the plan would reduce federal tax revenue by $ 1.5 trillion, swelling the deficit and forcing the government to borrow more.
“It juices growth in 2018, but it likely reduces growth in the early part of the next decade,” Zandi said. “My sense is that 10 years from now, the economy will be no bigger than it would have been.”
Under the plan, the economy would grow about 3% next year, up from 2.2% under the status quo, Zandi said. He thinks the economy would add an additional 800,000 or so jobs in 2018; Greg Daco, chief economist at Oxford Economics, estimates a more modest gain of 600,000.
But while higher interest rates would slightly dampen activity next year, they would have a bigger impact in 2019, leaving a net boost to growth of just three- tenths of a percentage point, Daco said. By 2020, the higher rates would overwhelm any remaining stimulus from the tax reform, resulting in a net drag on economic growth of about a half a percentage point, Daco said. And Zandi said the economy would lose jobs that year.