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Trump Tax plan analysis

Tax plan detail and review

On 22 December 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA or “the Act”), the most sweeping rewrite of the nation’s tax code since the Tax Reform Act of 1986. The tax plan slashes individual and business tax rates, while broadening the corresponding tax bases. Its cost, before macroeconomic feedback, is roughly $1.5 trillion over ten years, a limit set by the Congressional Budget Resolution for fiscal year (FY) 2018.

By 2021, the implementation of the tax plan will result in real GDP rising 0.6% above our previous baseline. Over this period, the unemployment rate will temporarily decline ¼ percentage point below the baseline, bringing modest additional upward pressure on inflation. Later, as the impetus from the tax cuts dissipates, as higher deficits and debt crowd out private investments and, as the personal provisions of the Act expire, GDP quickly slips back towards the baseline level. The modest boost to potential growth implies little dynamic revenue feedback. Hence, the TCJA is likely to lead to higher deficits and debt over the next ten years, exacerbating the nation’s fiscal imbalance.

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Income inequality

TCJA will shift the burden of taxation towards the lower end of the income distribution, especially after the individual provisions expire, exacerbating recent trends towards income inequality. It is also a large tax cut enacted with the economy near full employment, inflation rising towards the Federal Reserve’s 2% objective, and the Federal Open Market Committee (FOMC) already removing monetary accommodation. This raises the possibility of an unnecessary and ill-timed fiscal stimulus, the kind of “policy mistake” that has ended some previous expansions.

Labor

The impact of the tax plan on labor supply is minimal. The increase in potential GDP is attributable almost entirely to a 2% increase in capital services that itself results from an increase in nonresidential fixed investment that peaks in 2025, before starting to fade as the expensing of equipment is phased out.

GDP Growth

Through 2021, TCJA raises annual GDP growth by between 0.1 and 0.3 percentage point. The impact is larger in 2019 than in 2018 because in 2019 the catch-up in consumer spending is re-enforced by the growing impact on business fixed investment, especially from the expensing provisions that gain importance as bonus depreciation is phased out of the baseline. After 2025, when most individual provision of TCJA sunset and expensing is phasing out, growth slows below the baseline by as much as 0.4 percentage point.


Unemployment

Early on, the unemployment rate falls below the baseline by as much as 0.3 percentage point to cycle-low of 3.6%, the lowest unemployment rate since early 1969.

Initially, given modest upward pressure on the dollar, core inflation falls slightly below the baseline path. However, with the tightening of labor markets, inflation eventually moves above the baseline by about 0.1 percentage point, from 2021 through 2023, before that differential recedes.

The deficit

Federal budget deficits are larger through 2027, with the biggest impact coming in 2019 before the effects fade. Under TCJA, we project the unified budget deficit to exceed $1 trillion in fiscal year 2020, the largest deficit since 2012. However, unlike the deficit in 2012, which, with unemployment still elevated following the Great Recession, had a large cyclical component, the deficit in 2020 will come with the economy arguably beyond full employment and so be entirely structural in nature. The current account deficit also widens as nearly 40% of the extra federal deficits through 2027 are financed with savings from the rest of the world.

Experts

Chris Varvares

Chris has nearly 40 years of experience in macroeconomic modeling, forecasting and policy analysis, as co-head of US Economics at S&P Global. In his previous role as a principal of Macroeconomic Advisers and as a member of the staff of the President's Council of Economic Advisers (1981-1982); he served as a member of the US delegation to the OECD in April 1982. Macroeconomic Advisers was acquired by S&P Global in 2017.He and the S&P Global US economic principals serve as consultants to key agencies of the US and foreign governments, major trade associations, and private corporations, and are widely quoted in the business and financial media. S&P Global (Now a part of S&P Global) is widely recognized as among the most accurate forecasters of the US economy. Chris is a recent past president and a former director of the National Association for Business Economics (NABE). He served as president of the NABE Gateway chapter in St.Louis and is a member of the American Economic Association.He serves as a member of the New York State Economic and Revenue Advisory Board and has participated in the meetings of the Outside Consultants to the CBO, has been a panelist for the World Economic Forum, and he sits on advisory boards for the Olin Business School at Washington University and the Walker School of Business and Technology at Webster University. Chris holds a Bachelor of Arts in Economics from The George Washington University and received his graduate training (ABD) in Economics from Washington University in St. Louis, where he was also a member of the adjunct faculty in both the economics department and the Olin School of Business.He serves as a member of the New York State Economic and Revenue Advisory Board and has participated in the meetings of the Outside Consultants to the CBO, has been a panelist for the World Economic Forum, and he sits on advisory boards for the Olin Business School at Washington University and the Walker School of Business and Technology at Webster University.Chris holds a Bachelor of Arts in Economics from The George Washington University and received his graduate training (ABD) in Economics from Washington University in St. Louis, where he was also a member of the adjunct faculty in both the economics department and the Olin School of Business.

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Patrick Newport

Dr. Patrick tracks the investment and construction sectors for the Global Insights Macroeconomic Service and serves on client consulting projects. He manages long-term forecasts for Global Insights and co-manages the macroeconomic model. He joined the company in 1998. Previously, he worked as a research economist for the Washington State Department of Revenue, where he later served as a senior economist for the Office of the Forecast Council of Washington State.He holds a Bachelor of Arts in Business Administration and a Master of Arts in Economics from Louisiana State University, US. Dr. Patrick attained his doctorate in Philosophy from Harvard University, US. He speaks English and Spanish.

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Jim Diffley

Formerly chief economist of S&P Global US Regional Services Group, he was responsible for the Regional Core Macroeconomic Service and the Global Insight Real Estate and Construction Service. Since 1998, Jim has supervised the quarterly economic forecast of the 50 states and over 300 metropolitan areas of the United States. He regularly makes presentations of these regional economic forecasts and analysis to clients, conferences, governmental bodies and the press.Jim is now responsible for customized consulting projects, specializing in public finance. These have included long-term projections of cigarette consumption, forecasts of capital gains realizations, analysis of the economic impact of the securities industry on New York State, analysis of the impact of changing oil prices on local economies and the economic impact of various facility locations.Jim's academic work in the US includes a Bachelor of Arts in Mathematics & Economics from State University of New York at Buffalo, a Master of Arts in Economics and a doctorate (ABD) at the State University of New York. From 1982 to 1987, he was on the economics faculty at Adelphi University, US.

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James C. Kelly

James prepares forecasts and written anaylsis for states in the Midwest and South, including Kansas, Missouri, Arkansas, Mississippi, Georgia, and Florida, as well as their respective metropolitan areas. He regularly speaks to clients about developments and trends in the region's economy and with regional media outlets, including quotes in the St. Louis Post-Dispatch. James also leads the group's residential real estate forecast product and helps advance the team's use of data analytics and Power BI to make forecast data and visualizations more accessible for clients.Before joining S&P Global, James received a Bachelor of Science in Economics from the University of Missouri, US, and a Master of Science in Economics from the University of Illinois at Urbana-Champaign, US.

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  • Economic forecasts and analysis
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