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
- Short-term economic expansion is projected to be driven by a fiscal stimulus effect of approximately $200 billion in aggregate demand, with some models anticipating a 3% growth rate compared to sub-2% historical averages, though a 0.6% to 1.1% increase is noted as necessary for the tax cuts to be self-financing.
- Medium-term growth over the next decade is forecasted to be more modest, with independent forecasters predicting a 0.04% plus or minus increase in GDP, while CBO projections suggest a 0.5% larger economy after ten years, translating to a 0.05% annual growth rate increase.
- Long-term structural changes are expected to include a shift in investment composition toward structures and equity financing, increased productivity, and higher wages, though these effects are described as multi-year processes that could extend over decades.
- Significant long-term fiscal risks are identified, including trillion-dollar deficits persisting for the foreseeable future, interest payments expected to triple within a decade, and public debt reaching approximately 100% of GDP within ten years.
- Demographic constraints and political gridlock are expected to prevent annual GDP growth from sustaining 3% over a 10-year period, with difficulties anticipated in enacting revenue-neutral tax reform or addressing entitlements like Social Security.
- Specific tax code provisions are predicted to create a temporary boost in structures investment via lower marginal rates, while simultaneously imposing a tax penalty on R&D starting in 2022 through five-year amortization requirements.
- External and competitive factors, such as the potential for Chinese technological advancement to outpace U.S. digitization and the need for foreign borrowing, may negatively impact national income growth relative to GDP.
- Investment dynamics are expected to be influenced by the "accelerator" effect of anticipated growth and global liquidity, which may delay private investment crowding out for at least five years while U.S. interest rates remain low.
- Political uncertainties regarding the permanence of tax provisions and the feasibility of future fiscal adjustments are expected to create a "sugar high" of short-term growth that may eventually give way to difficult long-term outcomes.
- A divergence exists between models assuming the tax cuts are paid for, which project positive long-term outcomes, and scenarios like the IMF model which do not assume offsetting measures and project negative economic effects after a decade due to rising debt.