Tax cuts may deliver caffeine rush to economy, but jolt of adrenaline might not last long

Economists question thrust and timing of Trump's 'massive' tax cuts.

  • By Jeffry Bartash,
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The U.S. economy will get a big jolt of adrenaline in 2018 from the Trump tax cuts, but beyond that? Experts are divided over whether the overhaul will provide deep and long-lasting benefits.

Virtually every economist agrees the tax cuts will boost gross domestic product next year. The new law will make it cheaper for businesses to invest right away and give most Americans more take-home pay.

In other words, are the sweeping tax changes more like a shot of caffeine for an already stimulated economy that will wear off quickly? Or are they positive changes to the DNA of the U.S. economy that will drive improved performance over time and help the middle class?

Many economists harbor doubts about the long-term impact or the timing of the tax cuts even if they support the underlying goal of making the U.S. more competitive globally. "There is little evidence linking tax cuts to stronger growth," contended Andrew Hunter of Capital Economics.

Another critic, chief economist Mark Zandi of Moody's Analytics, has argued that the economy doesn't need budget-busting tax cuts when unemployment is so low and the current expansion is nearly nine years old. By some estimates the tax cuts could add several trillion dollars to record-high federal deficits over the next decade.

Zandi predicted the tax law will harm the economy several years from now.

Yet, even critics such as Zandi acknowledge the U.S. will get an initial boost. According to a Moody's estimate, the economy will grow an average of 2.9% a year until 2020, up from a forecast 2.5% without the tax cuts. That means more jobs and higher pay for workers, among other things.

Higher economic growth and an even tighter labor market, however, could spur inflation and force the Federal Reserve to more aggressively raise interest rates. Higher rates in turn would raise the cost of borrowing for companies and offset the benefits they get from lower taxes, skeptics say.

"We continue to believe this is the wrong time for fiscal stimulus," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics and 19-time winner of MarketWatch's Forecaster of the Month award.

Some economists doubt U.S. interest rates will really rise all that much and reduce borrowing. The U.S. added more than $7 trillion in federal debt during the Obama years, and rates remained stubbornly low.

What's more, the Fed itself has predicted its key short-term rate will rise to no more than 2.8% in the long run — remarkably low by historical standards — amid a global environment of soft inflation.

Others believe the reduction in corporate tax rates and other changes meant to boost business investment could no longer be put off. The success of the tax bill will depend on whether those goals are achieved.

While he calls the tax bill far from perfect, chief economist Stephen Stanley of Amherst Pierpont Securities said Washington needed to do something to help American companies compete better with global rivals and make the U.S. a more attractive place to do business.

"Companies are looking for ways to invest in other countries with lower tax rates and regulations," he said. "The U.S. needs to provide a more favorable environment for investment."

Gary Cohn, President Trump's top economic adviser, said making America a better place to start businesses, hire and invest largely explains why a Republican-led Congress slashed corporate taxes for the first time since 1986.

The goal of Trump's economic strategy, he noted, is to discourage U.S. companies from moving jobs or headquarters overseas and getting foreign firms to open businesses here.

"This is about competing with the rest of the world," Cohn said Wednesday at an event sponsored by the online news service Axios.

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