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Economy
In Tax Overhaul, Trump Tries to Defy the Economic Odds

By PATRICIA COHENDEC. 20, 2017

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A North Carolina plant that recycles plastic bottle chips. President Trump and
congressional Republicans have argued that their rewrite of the tax code will
create more jobs and raise wages. Credit Chuck Burton/Associated Press

When President Trump adds his distinctive signature to the tax bill, he will also
be making a huge bet that the Republican strategy of deep cuts for businesses and
wealthy individuals will fuel extraordinary growth across the board.

Perhaps more than any other American political leader, Mr. Trump knows that long
shots, like his own presidential bid, sometimes pay off. In that vein, he and
congressional Republicans are arguing that their bitterly contested and expensive
rewrite of the tax code will ultimately create more jobs and raise wages.

If they are proved correct, they will be repudiating not only historical
experience, but most experts. From Congress�s own prognosticators to Wall Street�s
virtuosos, scarcely any independent analyses project anything like the rosy
forecasts offered by the president�s top economic advisers.

To Mr. Trump and his allies, the normal models just do not fully capture the high-
octane �rocket fuel� embedded in the tax plan. Mr. Trump intuitively understands
just how much attitudes and expectations can shape economic decisions.

With a businessman in the White House, Mr. Trump argues that companies, large and
small, have a renewed faith in the economy. And the corporate tax cut, combined
with the rollback in regulation, will prompt waves of new investment and hiring, as
middle-class Americans liberally spend the extra money in their pockets.
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�We�re going to easily see 4 percent growth next year,� the National Economic
Council director, Gary D. Cohn, said. Steven Mnuchin, the Treasury secretary,
declared the tax plan would generate enough growth to more than pay for its $1.5
trillion cost.
But those pronouncements are at odds with estimates from the former employer of
both men, Goldman Sachs. The bank projected that the tax bill will add just three-
tenths of 1 percent of growth in the next two years, before its impact peters out.

The firm�s annual growth estimate of 2.5 percent for 2018 matched the one issued
this week by the nation�s central bank, the Federal Reserve, while the latest
median Wall Street forecast hovered close by. And in 2019, growth is expected to
drop to 1.8 percent, Alec Phillips, chief United States political economist for
Goldman, said Wednesday after the Senate vote.

�We note that the effect in 2020 and beyond looks minimal and could actually be
slightly negative,� the company said in a recent published summary.

Such projections are unlikely to deter Mr. Trump and Republican leaders from
declaring success next year. Lower taxes and extra incentives to invest in 2018 are
almost certain to encourage consumers to spend and businesses to expand.

Reduced rates mean most Americans will start taking home more money right away.
Roughly three-quarters of taxpayers are expected to get a cut next year, according
to the nonpartisan Tax Policy Center.

Employers may offer other sweeteners, even if they were not specifically spurred by
the tax plan. AT&T announced Wednesday that it was giving more than 200,000
domestic employees a $1,000 bonus when the tax bill is signed. Fifth Third Bancorp,
based in Cincinnati, also promised a $1,000 bonus and said it would raise the
company�s minimum wage to $15 an hour.
What�s in the Final Republican Tax Bill

The legislation would cut taxes for corporations. American taxpayers, in large
part, would also get cuts, though most of the changes affecting them would expire
after 2025.

At the same time, the anticipated cut in the corporate rate to 21 percent from 35
percent and other business perks are lifting the stock market to new heights. In an
earnings call this week, Alan B. Graf Jr., FedEx�s chief financial officer, said
the company planned to use part of its tax windfall to fatten dividends.

But like a shot of adrenaline, that initial burst of economic activity is likely to
fade.

Some provisions of the bill were intended to be sharp and short. Next year, for
example, businesses will be able to borrow money and deduct the cost of those loans
at the current rate of 35 percent. But later on, when they reap the profits, they
will pay a tax rate of only 21 percent. That could end up causing firms to simply
shift the timing of investments they would have made regardless of a change in the
tax code.
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�The really hard question a year from now is going to be is how much of the
miniboom we see is just an acceleration of stuff that was going to happen anyway or
additional investment that is really going to spur the economy,� said Mihir A.
Desai, a professor of finance at Harvard Business School.

Tax cuts can provide an added incentive to invest. But as most chief executives
acknowledge, they are generally not the crucial factor.

Investment decisions are much more closely linked to demand for goods and services
or technological advancement. As it is, manufacturers are not making full use of
the capacity in their existing facilities.

Mr. Graf of FedEx held out the possibility of more spending on capital investment
and hiring next year. But he noted that the economy as a whole would first have to
�increase materially.�

Over time, most of the broad-based tax cuts will disappear. Although the richest
sliver of Americans will continue to get a break, most people who earn less than
$100,000 will see their taxes rise, which could slow the economy�s primary engine,
consumer spending.

Further tightening is likely if the Republicans follow through on sharply cutting

Medicare, Medicaid, Social Security and other programs that tend to put extra cash
into the pockets of lower and moderate-income households.

Either way, the deficit will continue to balloon. Over the last decade alone, the
deficit has more than tripled. So far, the interest needed to cover that enormous
loan has remained relatively small because interest rates have been at historically
low levels.

But those costs are expected to soar. The Federal Reserve has indicated that it
intends to slowly but surely raise the benchmark interest rate.

Some economists support such deficit spending during recessions, but they worry
that offering stimulants when the economy is on fairly steady ground can backfire.
Although employers have resisted raising salaries by much, they continue to
complain about the tightness of the labor market. The jobless rate has dipped to
4.1 percent while job openings have remained at record high levels.

Virtually no economists believe that the tax cuts will pay for themselves. Several
studies have shown that they rarely cover more than a third of the cost. Others
have questioned whether cuts produce any significant growth at all � even if they
do encourage some individuals to work, save and invest. In a study that William G.
Gale and Andrew Samwick did for the Tax Policy Center, they concluded that cuts
that increase budget deficits �in the long term will reduce national saving and
raise interest rates.�

The pattern of short-term promise followed by disappointment is one that other

presidents have experienced. President Ronald Reagan in 1981 and President George
W. Bush in 2001 and 2003 both passed tax cuts that delivered temporary bumps to the
economy followed by slowdowns and rising deficits.

�The clear consensus among independent economists is that the impact of the tax
cuts on growth is nowhere close to what the administration is talking about,� said
Mr. Desai of Harvard. Whatever growth does occur, he added, will be �counteracted
by the fiscal irresponsibility of the bill.�

A version of this article appears in print on December 21, 2017, on Page A1 of the
New York edition with the headline: Gamble by Trump on Expansion Defies Odds. Order
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