Economists See GOP Tax Plan Producing Growth Spurt, But Split Over Long-Term Effect

The Republican plan to overhaul the U.S. tax code would likely lift economic growth in the short term, economists say, but they are split over whether the boost would last longer than a few years.

An overwhelming majority of forecasters in The Wall Street Journal's monthly survey of economists said the GOP tax plan unveiled last month would, if implemented, raise the growth rate for U.S. gross domestic product over the next two years. Some 60% saw a modest lift to output compared with its current trend, while 27% said the annual growth rate would jump by more than half a percentage point.

The announced framework, which lacks some details and could change as lawmakers flesh it out in the coming weeks, features lower tax rates on corporate profits, incentives for business investment and fewer individual income tax brackets, among other changes.

But roughly half of the economists said any growth spurt would fade over time. Asked about the tax plan's likely effect on the economy's long-run growth rate, 48% predicted a modest increase while 38% said the U.S. would remain on its current trajectory. Just 4% said the tax plan would boost the GDP growth rate by more than 0.5 percentage point a year, while 10% said growth would be slower than if there had been no tax changes.

"I fear we get tax cuts that stoke more of a sugar high for markets, but fail to achieve productivity-enhancing reforms," said Diane Swonk, founder of DS Economics, who predicted a modest growth boost in the short run but a modest decline in growth over the long run.

On the other hand, Lynn Reaser of Point Loma Nazarene University, a former chief economist at Bank of America, said she expected a significant short-term pickup followed by a modestly higher long-run trajectory for annual growth.

"Corporate tax cuts could turn business confidence into reality," she said.

President Donald Trump has said he wants to boost U.S. economic growth, which has hovered a little above 2% since the 2007-09 recession ended, above 3% a year. The tax overhaul plan unveiled by Republican leaders on Sept. 27 is a key ingredient.

"Our country, and our economy, cannot take off like they should unless we transform America's outdated, complex and extremely burdensome tax code," Mr. Trump said Wednesday during a speech in Harrisburg, Pa.

The historical link between tax cuts and economic growth is tenuous, and many economists have warned that boosting economic growth in a sustained fashion will be difficult. They say underlying forces are restraining the economy's ability to grow quickly, including sluggish labor-productivity gains and slowing growth in the size of the U.S. workforce as the population ages. To raise the economy's potential growth rate, the tax-law changes would have to reverse those trends.

Lou Crandall, chief economist at Wrightson ICAP, called the current tax plan "a classic vaporware announcement" -- like software that is advertised but yet to be written -- and said he didn't know at this point how to evaluate the proposal's economic effects.

"Congress has a lot of heavy lifting to do," he said.

The economists were asked what best described the tax plan's expected effect on annual GDP growth rates over the next two years and in the long run. The options: a significant decline of more than 0.5 percentage point from the current trend, a more modest decline, no change, a modest increase or a significant increase of more than 0.5 percentage point.

The effects of the GOP tax plan would extend beyond overall economic growth. Most economists surveyed by the Journal said if it became law, the unemployment rate would be the same or lower and annual inflation would be the same or higher over the next decade.

The Federal Reserve could respond to stronger price growth by raising interest rates more rapidly or further than it would have otherwise. Nearly two-thirds of economists said the central bank's benchmark federal-funds rate would be higher over the next 10 years than if the tax plan didn't become law.

As for the federal budget deficit, 85% of economists said the GOP tax plan would cause it to widen over the next decade.

"The short-term increase in GDP is not enough to offset the decrease in revenues," said Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center.

The survey of 59 business, financial and academic economists was conducted Oct. 6-10. Not every economist answered every question.

More broadly, the economists surveyed continued to expect healthy economic growth into 2018, and on average saw the unemployment drifting down from its September level of 4.2% to 4% by the end of next year.

The average probability of a recession starting in the next 12 months was 16%, unchanged from the prior month and down from 20% a year earlier.

Asked about risks to the outlook for economic growth, 25 economists saw them tilted to the upside while 22 saw them tilted to the downside and two said they were balanced. A possible war with North Korea was listed by several forecasters as a downside risk, while many saw fiscal stimulus as an upside risk.

--Josh Zumbrun contributed to this article.

(END) Dow Jones Newswires

October 12, 2017 10:14 ET (14:14 GMT)