Kevin Hassett, Chairman of the Council of Economic Advisers said that the lowering the corporate tax rate to 20%, as a part of President Donald Trump’s tax reform proposal suggests that it could help lift GDP by 4% in the first year alone.
Hassett, while talking to the Tax Policy Center and the Tax Foundation, deemed the Trump tax plan to be strongly pro-growth, pro-work, and announced that he expects the plan to accelerate economic output and growth. The centerpiece of the plan is the lowering of the corporate income tax rate from the current 35% to 20%.
“Just to illustrate the scale of these effects, a rough preliminary estimate of the combined revenue effect of the corporate tax proposal, combined with these macro elasticity estimates, implies that tax cuts of this scale would lift GDP per capita by approximately 4% over the first year, although there are a number of reasons to expect that the actual impact of the reform would be much smaller than that, including the fact that we are currently near full employment, the potential for a significant growth effect is still very reasonable and empirically valid.” Hassett said.
In addition to further slashing rates, Hassett noted that the framework allows the corporations to write off new investments and keeps the research and development and low-income housing credits. For family-owned and small businesses, the framework reduces the same rates down to 25%.
“When you get more of an economic input like work, you get more economic output—and you get more economic growth,” Hassett said. “And on the corporate side, companies will no longer be incentivized to offshore, and what they save in taxes should help raise corporate investment and wages.”
Hassett also points out that even the former President Barack Obama proposed lowering the corporate tax rate down to 28%. “My guess is that President Obama did not make that proposal because he thought it would have no effect.”
“In France, a country not exactly known for its longstanding devotion to supply-side economics,” Hassett said, “President Emmanuel Macron has proposed cutting the corporate tax rate to 25%. And France’s current corporate rate of 33% is already lower than ours. France joins such countries as Denmark, Sweden, and Greece—a country that recently elected an avowedly socialist government named the Coalition of the Radical Left or SYRIZA in Greek—in having lower corporate tax rates than our own.”
For individuals, the framework creates more brackets of zero, 12, 25, and 35%, and increases the number of people who could be eligible for a zero rate.
“It is scientifically indefensible to say—as the [Tax Policy Center] report of last Friday does—that the framework [would] have little macroeconomic feedback effect. It is simply inconsistent, with mountains of evidence that I am about to discuss, to have no growth effects from tax changes this significant,” Hassett said.
Hassett says that the economists have come to a consensus that broadening the base and further lowering the marginal tax rates boosts well-being and economic growth.
“I have been in this room often over the past 20 years and have witnessed head-nodding that broadening the base and lowering the rates, as President Trump’s plan aims to do, is a recipe for better tax policy. I can’t recall ever seeing anyone in this room argue that narrowing the base and raising rates was a recipe for growth.”