Gauging the Economic Impact of the Proposed Tax Reform
What some economists believe
Many economists are not optimistic about the tax bill because they believe it is poorly timed. The US is in its ninth year of economic expansion since the 2008 crisis, and the Us economy is growing faster than Federal Reserve’s estimates while maintaining a lower inflation rate.
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Some economists have predicted that the corporate tax cut could increase inflation initially which might trigger the Federal Reserve to increase interest rates more aggressively to control this inflation. Bankrate.com senior economic analyst Mark Hamrick stated that the major concern for the Federal Reserve is that the tax bill could overheat the economy, creating bubbles in the stock market and other asset classes.
A rising deficit
Many independent economists also raised concerns that the high cost of the tax bill would increase the US budget deficit significantly. However, Republicans in Congress have still defended the bill, stating that it would boost economic growth, which would pay for the bill by generating more government revenues.
But many economists, including the Congressional Joint Committee on Taxation, don’t agree. According to the committee’s estimates, the tax bill would lead to 0.8% economic growth over the next ten years, generating revenues of ~$458 billion—not sufficient enough to bear the cost of tax cuts, which would include an additional interest cost of about $51 billion.
After taking everything into consideration, Congress’s proposed tax reform bill would likely add ~$1 trillion to the $20-trillion national debt over the next ten years, according to the joint committee’s analysis.
How will Republicans handle such a big deficit?
In the short-term, the bill will likely add only $1 trillion to the national debt. In the long-term, the government could make individuals pay for the corporate cuts by increasing taxes on individuals and limiting healthcare aid.
The concern of the increasing deficit is putting pressure on the government to reduce the cost of their tax bill by 33%. The amendments recommended by the Senate are just the start.
The cost pressure could see many more amendments before the final tax bill is passed. One such amendment could be increasing the corporate tax above the proposed 20% rate, and so it remains to be seen if the final bill will actually end up benefiting the technology sector after all.