What is the purpose of tax reform?

IF MAKING America great again is the aim, you could do worse than bring back the economic growth rates of the late 1990s. President Donald Trump’s team reckons that the Republican tax plan making its way through Congress will do just that. “We are creating a model that creates economic growth in this country,” says Gary Cohn, the director of Mr Trump’s National Economic Council. Kevin Hassett, who runs the Council of Economic Advisers, reckons the bill should push growth above 4% per year.

Such heights are not beyond the realm of possibility, but if America reaches them tax reform will have little to do with it. That is not because of the specifics of the plan. Rather, it reflects an underappreciated reality: tax reform can accomplish many things, but raising long-run growth is not generally among them.

Most assessments of the Republican tax proposals, like most analyses of most tax plans, conclude their effects on growth will be small. The Penn Wharton Budget Model, a non-partisan public-policy initiative, projects that GDP in 2027 will be between 0.4% and 0.9% higher as a result of the bill.

Nonsense, say the adherents of the supply-side school of thinking. Economic growth can be broken down into changes in the supply of labour and in labour productivity. Supply-siders reckon that lower tax rates on labour income should raise its supply; lower...

via The Economist: Finance and economics Business Feeds

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