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u.s. tax plan

President Donald Trump speaks in the Grand Foyer of the White House in Washington, D.C., Dec. 13, 2017.Evan Vucci/The Globe and Mail

U.S. President Donald Trump says that the landmark tax cuts just approved by Republican lawmakers represent a Christmas present for the U.S. economy that will supercharge growth without ultimately affecting the deficit.

But economists are skeptical, to put it mildly.

Over the weekend, Mr. Trump predicted that the U.S. economy would "start to rock" once the cuts are enacted and predicted that the annualized growth rate, currently hovering around 3 per cent, would surge.

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"I think we could go to 4 per cent, 5 per cent or even 6 per cent, ultimately," said Mr. Trump.

The projections of the U.S. government's own experts tell a different story: The most sweeping revisions to the U.S. tax code in decades will generate a modest bump in economic output but come with a hefty price tag.

The changes are expected to generate an increase of about 0.7 per cent in gross domestic product over a decade, mostly in the next couple of years, while adding roughly $1-trillion (U.S.) to the deficit, according to the analysis by the bipartisan Joint Committee on Taxation.

With the U.S. economy expanding at a healthy clip and the unemployment rate at a 17-year low, some experts have questioned the need for legislation that further stimulates the economy without ensuring investment in areas that promote long-term competitiveness, such as infrastructure and education.

One enduring impact of the tax legislation will be to cut the statutory tax rate for American companies from 35 per cent to 21 per cent (in practice, U.S. corporations have paid far less than 35 per cent). Business groups have long lobbied for a reduction in the corporate rate, which they say puts American firms at a disadvantage on the global stage.

But it is not clear what U.S. companies will do with their tax savings and in what proportions. The administration has suggested that companies will pay their workers more and make investments in facilities and equipment; other options would be to return it to shareholders or stockpile the cash, as many large corporations are already doing (U.S. non-financial firms held a record $2.3-trillion in liquid assets at the end of the third quarter, according to the Federal Reserve).

"I don't think people should be expecting a boost in their wages right away, if ever, from this bill," said Lily Batchelder, a former deputy director at the National Economic Council and professor at New York University. Mr. Trump's talk of much higher growth rates is "really just blowing smoke."

The tax package has flown through Congress with exceptional speed: Less than two months have passed since lawmakers began considering it and no hearings were held on its contents, so companies are still digesting exactly what the legislation contains.

Even the experts are "still struggling to understand dozens of billion-dollar 'details' in this bill," wrote Martin Sullivan, chief economist at Tax Analysts, late last month. He predicted that the resulting "uncertainty and complexity will cast a long shadow over business decisions."

Republicans have praised the tax cuts as a boon for middle-class Americans, but the benefits are skewed toward the wealthy. For instance, in 2019, households earning more than $500,000 a year – the top 1 per cent of filers – will receive tax cuts of $61-billion, according to an analysis by the Joint Committee on Taxation. Households that earn between $20,000 and $100,000 a year – which represent the majority of tax filers – will receive tax cuts worth the same amount, about $61-billion.

While many American households will see a reduction in their taxes at first, the cuts will phase out over time unless lawmakers act to extend them. By 2027, households earning less than $75,000 will see their taxes increase on average compared with current law.

Michael Bloomberg, the billionaire former mayor of New York, wrote a scathing article last week blasting the tax package as "an economically indefensible blunder." He noted that he supported the lowering of the corporate tax rate but in a "revenue-neutral" fashion – in other words, in a way that doesn't expand the deficit.

Even some Republican economists discuss the current legislation in rueful terms. Gregory Mankiw, who served as chairman of the Council of Economic Advisers under president George W. Bush, recently called it a "missed opportunity" in a radio interview. "It's very easy to imagine a better tax bill than this one."

The U.S. Senate passed an overhaul to the U.S. tax code early Saturday morning, legislation that gives a massive tax reduction to corporations but an uneven set of cuts and benefits to individual taxpayers.

Reuters

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