How Will GOP Tax Plan Affect the Economy and Americans’ Wallets?

Republicans in Congress have successfully passed tax legislation – Senate Republicans sealed the deal in the wee hours of Saturday morning.

Both the Senate and House bills drop the corporate tax rate from 35 percent to 20 percent, but there are differences between the plans proposed by each chamber.

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The Senate bill, for example, repeals the Affordable Care Act’s individual mandate requiring Americans to purchase health care or pay a tax penalty. The House bill makes no changes to Obamacare, but reduces the number of individual tax rate brackets from seven to four — the Senate keeps that number at seven.

A “conference committee” of Republican senators and House members is expected to reconcile the differences between the tax reform plans before sending a final version to the desk of President Donald Trump.

Will a corporate-friendly tax overhaul help spur job and wage growth, or merely help the rich get richer?

Economists Edward Stuart, professor emeritus of economics at Northeastern Illinois University; and Gordon Parrish of the economics consulting firm Free Market Inc. offer their analyses.

Below, an edited Q&A with our guests.

What sort of impact do you expect the GOP tax plan to have on the economy?

Gordon Parrish: It should have a positive impact over time, but a marginal one. An important thing to note is that over 10 years, $1.5 trillion is really only 3 percent of total federal economic spending. That’s not the stuff of economic materials, but it will make a contribution. The effect of the tax cuts on incentives to work and invest is mostly positive, but in many cases, it’s mostly marginal.

Edward Stuart: On the economy? Almost nothing. On the distribution of income and wealth between rich and poor? Pretty significant: the poor will get poorer and the rich will get richer. But in terms of the macroeconomy, unemployment, GDP – almost nothing.

How will the proposals put forward by Republicans in the Senate and House affect the deficit?

Stuart: The deficit will get bigger and the fear among real economists is that as the deficit gets bigger, it will be even worse for middle-income and low-income people because then the way to trim the deficit is to cut back on Medicaid, Social Security, chip payments and federal aid to education – anything but military.

Parrish: The deficit is going to increase. I mean, history proves pretty much that if the so-called Laffer Curve is correct, we’re nowhere near the apex of that curve. The tax cuts can’t pay for themselves. That said, I wouldn’t give any credence to the Joint Committee on Taxation or other estimates of long-term revenue growth. Ten years is an eternity in politics and almost that long for economic forecasters. The only thing that you can say about a forecast over that many years is that it’s going to be wrong. In terms of the budget, probably spectacularly wrong. We do believe that on the margin, revenue will go up, not enough to replace all of the deficit, but tangibly.

Do you think the 20 percent corporate tax rate will spur economic growth?

Stuart: No. Not at all. Corporations are awash in money now. If they’re not increasing investment in making improvements to productivity with the hundreds of billions they already have, this isn’t going to make any difference. This corporate tax cut is a solution in search of a problem.

Parrish: It will. Certainly there are a wide range of corporations that are involved in tax avoidance strategies, which are counterproductive in the long-term – they’re only good for the tax benefits, so that’s going to be cleared away. It certainly makes us more competitive. We now have one of the highest corporate tax rates – 20 percent would put us on the low-end. There are some measures that say once you add up all the deductions, it’s not really a 15 percent cut, maybe it’s only a 3 percent cut. But if you look at the profit margins on most firms, 3 percent is enormous and that’s a huge benefit.

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