President-elect Donald Trump’s plan to cut business and personal taxes has supporters cheering, markets soaring – and critics fretting that Trumpanomics will send Uncle Sam to the poorhouse by dramatically shrinking federal revenues while boosting infrastructure and military spending.
But a new study suggests the impact of Trump’s tax cuts will be totally between the historical ditches and should not elicit so much hand-wringing and fear. In fact, the report says, their impact will be similar to that of tax cuts made in the Reagan and George W. Bush eras.
The economists believe that if Trump’s proposed cuts become law, the federal deficit would rise from the current estimated 3.2% of GDP to 3.5% in the first few years of the Trump administration. That would represent a $100 billion revenue loss to the U.S. Treasury. That’s more than a rounding error to Uncle Sam, but not enough of a pay cut to significantly change his lifestyle.
Federal tax revenues were 17.5% of GDP in 2016. Under the Trump plan, they would drop to about 17%. That’s a tad higher than in 2004-2007, the period following W’s cut in marginal tax rates. After the Reagan tax cuts of 1981-1985, federal revenues were 17.8% of GDP.
None of this means that Trump’s tax policies won’t have a significant impact on the economy, potentially spurring dramatic growth. As Bloomberg noted, the Deutsche Bank study doesn’t consider potential multipliers created by Trump’s proposals, including new spending prompted by lower marginal rates, and the extent to which businesses might act more aggressively in a less-regulated environment. By way of example, Bloomberg notes that Trump’s plan to allow manufacturing companies to immediately expense their capital investments could result in a huge increase in corporate spending.
In Washington, where you sit often determines where you stand on issues. But on the question of whether the new President’s policies will bankrupt the country, the facts seem clear. The answer is no.