President Trump is proposing tax reforms that could include cutting corporate tax rates, reducing individual marginal tax rates, and broadening the tax base. The right mix could generate 3-4 percent growth in gross domestic product, which may not seem a lot, but would be larger than any year in the last 11.
What does that mean to you? The president’s proposal would be the largest tax overhaul since President Reagan and Congress lowered household average marginal income-tax rates by 2 percent in 1987 and then again in 1988.
What would 2 percentage points in individual tax rate reductions mean for the overall economy? About 0.5 percent extra growth per year, says Robert J. Barro, a professor of economics at Harvard University. So 4 percent of individual tax rate cuts could equal 1 percent in economic growth, and that’s not counting corporate tax rates.
America’s economy has not recovered from the Great Recession. Real GDP has been growing at around 2% a year. This weak performance mostly reflects the lack of productivity growth since 2010. If Mr. Trump can raise annual productivity growth from zero to 2%, that alone would be a huge favor to the economy.
It would also take the economy to 4 percent economic growth per year, something the country hasn’t felt in a long time. In a recent analysis, Barro also looks at ways to reduce the federal debt, raise the age of eligibility for Medicare, other entitlement reforms, a border-adjustment tax, construction, and infrastructure spending. All will have an impact on the economy, and whether Americans can create and fill jobs and experience an economic renaissance of sorts.
Tax reform also includes reducing regulations, which are imposed on the conduct of business. So, when individuals have more money and more freedom, they are more likely to risk starting a new business, right? And that’s good for the economy, right?
All in all, at 3-4 percent annual economic growth, Americans may begin to recall what it feels like to be in charge of their own future. And the dignity of feeling in control of one’s future leaves open a lot of possibilities.