Conference Presentation, Panel
How the New Tax Cuts Are Shaping the U.S. Economyand Our Fiscal Future
Milken InstituteJosh Barro, Eric Cantor, Jason Furman, William Lee, Maya MacGuineas, David Freeman, Jr., Steve
- Panelist Composition: The discussion featured Eric Cantor (former House Majority Leader, now at MOLUS), Jason Furman (former CEA Chair, now at Harvard), Bill Lee (Chief Economist, Milken Institute), and Maya McGinnis (President, Committee for a Responsible Federal Budget).
- Core Economic Debate: The panel analyzed the new tax law's impact on GDP growth, business investment, wage growth, and long-term fiscal sustainability amidst projected trillion-dollar deficits.
- Growth Projections:
- Congressional Budget Office (CBO) and most macroeconomic models project a GDP growth increase of roughly 0.7% to 0.06% annually over the next decade.
- These projections fall significantly short of the ~0.6% to 1.1% annual growth rate required to fully offset the legislation's $1.5 trillion cost.
- The IMF model is a notable outlier, projecting a negative GDP impact after a decade due to rising debt levels.
- Supply-Side Mechanisms:
- The tax cut lowers the cost of capital, which is expected to encourage capital expenditure (CapEx) and improve productivity.
- However, the legislation simultaneously increases the effective marginal tax rate on Research & Development (R&D) starting in 2022 by requiring amortization rather than immediate expensing.
- Bill Lee argues that high corporate debt levels (debt-to-GDP at historic highs) have previously shifted investment toward tangible assets rather than intangibles like R&D; the tax bill may alter this by reducing the tax advantage of debt financing.
- Fiscal Sustainability Concerns:
- The Committee for a Responsible Federal Budget projects debt held by the public will reach approximately 100% of GDP within ten years.
- Interest payments on the federal debt are projected to triple over the next decade, becoming the fastest-growing component of the federal budget.
- The inability to "pay for" the cuts creates high uncertainty, potentially discouraging the long-term capital investment the bill aims to stimulate.
- Short-Term vs. Long-Term Effects:
- Panelists agreed that 1–2 years may see "sugar-high" growth (up to 3% in some models) due to aggregate demand stimulus, but long-term growth remains constrained by demographics and productivity.
- Eric Cantor posits that current sub-2% growth under the prior administration necessitated a fiscal stimulus to create political capital for future, difficult spending decisions on entitlements.
- Jason Furman and Maya McGinnis argue that implementing tax cuts without corresponding revenue or spending cuts undermines the political feasibility of future entitlement reform.
- International Competitiveness:
- Eric Cantor emphasizes the bill's role in making the U.S. more competitive relative to China by lowering corporate tax rates and attracting capital repatriation.
- Bill Lee counters that the primary driver of investment is the "accelerator effect" (demand for capacity) rather than the cost of capital, especially given the current global "savings glut."
- Policy Uncertainties and Future Actions:
- A significant portion of the tax law is temporary; making it permanent would require further legislative action or spending cuts not currently on the agenda.
- Jason Furman notes that most models assume the debt will eventually be paid for to yield positive long-term effects; failing to do so results in net negative outcomes.
- Bill Lee warns that increased foreign borrowing to fund deficits reduces National Income (GNP) relative to GDP, even if domestic GDP rises.
- Q&A Highlights:
- Immigration: Bill Lee identifies immigration as the single largest lever for addressing long-term labor force shrinkage and productivity growth, contrasting with the deficit concerns raised by Maya McGinnis.
- Spending Freeze: When asked about freezing the budget, panelists noted that without a crisis or action-forcing mechanism, there is no political will to freeze spending, as mandatory spending (entitlements) comprises the vast majority of the federal budget.
- Retirement Age: The panel identified raising the Social Security retirement age as a necessary "no-brainer" for solvency, though immediate bipartisan action is unlikely due to current political toxicity and presidential opposition.
- Market Reactions:
- Unlike the early 1990s, the bond market has not reacted with sharp interest rate spikes to current deficit levels, partly due to the global demand for safe assets and low inflation expectations.
- Panelists warn that while immediate crowding out is unlikely due to excess global liquidity, long-term interest rates may rise 15–20 basis points, reducing the net benefit of the tax cuts.
- Future Outlook:
- The panel expressed uncertainty regarding external factors like AI productivity breakthroughs and China's economic trajectory, which could alter the 10-year growth outlook more than the tax bill itself.
- There is a consensus that the current fiscal path is unsustainable, but the "rock bottom" required to trigger a grand bargain on entitlements and revenue has not yet been reached.