As President # Donald Trump #, senior administration officials and GOP lawmakers this week rolled out a framework for what they hope will be the first comprehensive tax overhaul signed into law in more than three decades, a common refrain among reform supporters has been that a tax bill's passage would open the door to stronger economic growth over time.
Trump, for one, warned on Wednesday during a tax-focused speech in Indianapolis that "our country and our economy cannot take off like they should unless we dramatically reform America's outdated, complex and extremely burdensome tax code."
The idea that tax reform will spur the economy forward and out of its sub-3 percent annual expansion malaise is a key tenet of Trumponomics and has been repeated time and again by Trump supporters, GOP lawmakers and members of the administration in recent months.
But how accurate is that assessment? Can tax reform kick-start economic growth, and is this the plan that can do it?
There unfortunately isn't an easy answer, as research has been mixed as to whether tax cuts definitively result in stronger economic growth.
A Congressional Research Service report from 2012 argued that "the evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie," although the document generated considerable backlash, largely among Republicans, who argued its methodology was flawed.
But a separate 2014 study from the Brookings Institution found that "many estimates suggest [tax reform's net impact on GDP growth] is either small or negative." The report suggested that "tax rate cuts may encourage individuals to work, save and invest, but if the tax cuts are not financed by immediate spending cuts, they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates."
Conservatives, however, have been quick to point to the strong economic growth that has ended up following some significant tax tweaks in the past. As the right-leaning American Enterprise Institute notes, real GDP growth averaged nearly 5 percent between 1963 and 1969 as Presidents John F. Kennedy and Lyndon B. Johnson rolled out across-the-board tax cuts for individuals and businesses.
Attention is also often drawn to tax cuts enacted under former President Ronald Reagan in the 1980s. Reagan's first batch of tax cuts in 1981 was signed a year before the U.S. emerged from a double-dip recession and enjoyed an impressive run of annual GDP growth in excess of 3 percent each year between 1983 and 1989.
But even those examples of strong economic rowth following tax tweaks come with some caveats. The U.S. entered recessions in 1969 and 1990, so even if they helped spur growth in the short-term, the tax overhauls didn't exactly guard against an economic slowdown, either. And given that the U.S. is already more than eight years into an economic recovery, there's some concern that rocking the boat with tax reform at this point would ultimately send the stock market and the economy into dangerous territory.
"You have to come back to the maxim that economic recoveries don’t die of old age. But like all of us, they don’t walk as fast as they used to," says Mark Hamrick, a senior economic analyst at Bankrate.com. "What you don't want to do is exacerbate the sustainability of the [economic] expansion by injecting an elderly athlete with adrenaline, which causes him to have a heart attack."
Hamrick notes that tax reform has indeed been used in the past to propel the economy forward. But each instance has included different legislative terms and has been carried out in different economic environments. And each reform has affected the economy in different ways. An analysis published Wednesday by Politico, for example, didn't find a considerable correlation between cuts to the top tax rate and GDP per capita growth over the past five decades.
"In reality, there’s no evidence that a tax cut now would spur growth," Bruce Bartlett, who served as a domestic policy adviser to Reagan during the 1980s, wrote in an op-ed for The Washington Post on Thursday, alleging that "Republican rhetoric around tax cutting" amounts to "wishful thinking." "Even if they had released a complete plan – not just the woefully incomplete nine-page outline released Wednesday – Republicans have failed to make a sound case that it’s time to cut taxes."
Similarly, Hamrick says the relative lack of specific reform details makes it difficult to issue a blanket statement as to how much the economy stands to improve under Trump's new tax plan.
"I think the consensus ends up being that, based on what we know, we have to have limited expectations right now about having a significant boost to GDP, either in the intermediate term and the longer-term based on all this," Hamrick says, noting enough finer details still need to be worked out by lawmakers that it's tough to say definitively what the framework would mean for the economy. "Having said that, I think most people would tend to think that the greatest hope would be that you get some sort of meaningful tax reform as it relates to corporations, and that's sort of the first step."
Responses to and analyses of the Trump tax plan to this point have been widely divergent and, perhaps unsurprisingly, largely split along partisan lines. Progressive and left-leaning analysts and think tanks have lined up against the blueprint – which at this point is just that, a framework that will be beefed up in the weeks and months ahead as congressional tax writing committees make decisions about income tax brackets, which deductions to reduce or curtail and the rate at which earnings made outside the U.S. will be taxed in a bid to kick-start widespread repatriation.
"The idea that this plan would help average Americans instead of the wealthy and big corporations has been a hoax all along," Frank Clemente, the executive director of the progressive tax-focused think tank Americans for Tax Fairness, said in a statement Wednesday. "This plan will not lead to robust job creation or economic growth, but its eye-popping cost will lead to deep cuts in Social Security, Medicaid, Medicare, and public education that will leave working families in the cold."
Conservatives, meanwhile, have countered that the plan would, in fact, help the middle class and generate considerable economic growth in the years ahead. They also argue the stronger growth and increased business activity generated by the overhaul would in essence broaden the government's tax pool, allowing the cuts to essentially pay for themselves and not wreak havoc on the national debt.
"It's time for the government to get out of the way and let Americans keep more of the money they earn. If they're allowed to do that, the economy will go back to growing, and America can be more prosperous than ever," Tommy Binion, the director of congressional and executive branch relations at The Heritage Foundation, wrote in a blog post Tuesday.
Among more independent analysts like Hamrick, however, the response has been more muted. Michael Gapen, a managing director and chief U.S. economist at Barclays Investment Bank, speculated in an interview Thursday with CNBC that the GOP-led reform effort "can help the supply-side [and businesses] a bit."
But he cautioned that "getting things up to 3 percent" annual economic growth would be "very difficult." The proposed tax overhaul may give the economy a jolt, but reaching the Trump administration's growth target could be a steep task.
And although Trump has been quick to praise economic expansion that during the second quarter hit 3.1 percent to reach its fastest pace since early 2015, the U.S. is not yet averaging 3 percent growth over the course of an entire year. Trump and those in his administration have indicated it may take a few years to get the economy up to 3 percent growth on an annual basis. But Gapen is among several analysts who are skeptical that the administration's target will become a reality anytime soon.
"I mean, potential [annual economic] growth right now, we all estimate it kind of around 1.5 [percent] to 1.7 [percent], so you're talking about a doubling of potential growth," he said. "You're talking about needing to get productivity back to where we were in the 1990s for a sustained period of time. I think that's very low probability at this point."
More likely in his mind, Gapen said, would be a situation in which the tax overhaul generates "a four to five quarter impulse to growth, and then it fades."
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