“Today’s program looks at tax cuts and economic growth. Mike, let the battle begin. I mean the battle over the President’s tax plan. The Trump administration has made a proposal to significantly lower tax rates, while at the same time curtailing some deductions and exemptions. One of their goals is to spur economic growth and job creation. Will it work?”
“Well that’s obviously the big question, and although there are differences this is one area where most economists tend to agree. What they agree on are two things: One, when we look at the data over decades, and obviously over decades our tax system has changed. Rates go up. Rates go down. Deductions come and go. We don’t actually see much of a correlation between changes in the tax code and economic growth.”
“One of the reasons why we find that is the second thing we economists agree upon which is that when tax changes are made they’re normally made in a way that one part of the change will reduce tax liability, another part of the changes will increase tax liability.”
“I think the President’s plan, that he’s articulated, is a perfect example of this. He wants to reduce tax rates. Now if that’s the only thing he would do then obviously that would reduce what people pay in taxes. But at the same time, he wants to take away some tax deductions and tax exemptions. For example, the deduction for state and local taxes has been mentioned. And what that does is increase tax liability.”
“So when you put the two together you’re actually not going to see overall, it’s going to vary by individual, but overall you’re not necessarily going to see much change in the amount of taxes raised. And again, we’ve seen this from generation to generation to generation.”
“So I think if the President’s tax plan goes through we may see a little of temporary bump in economic growth, but if history is any guide it won’t have much of a correlation long run with how fast the economy is expanding.”
This post was originally published in College of Agriculture and Life Sciences News.