Economy Would Grow Faster With Trump Tax Plan: Be Ready For Stronger Sales

The Trump tax plan is likely to boost the economy—if implemented. Passage in Congress looks doubtful to me, but political forecasting is so difficult that it is worth considering what would happen if the tax plan is adopted.

Supply-side tax cuts, which dominate the Trump plan, can have very strong benefits to economic growth. However, the effects tend to be spread over time, starting slowly and accumulating with the years. There will be few short-term impacts on the overall economy, perhaps an increase in confidence and optimism.

The reporters I talk to expect to hear all about stimulus because companies have more money. That is not the key issue. The big impact from these tax cuts comes from higher incentives for businesses to invest. These incentives do not influence every business owner.Some are too pessimistic to be lured into spending money by a lower tax rate. Others are already spending every dime they can get their hands on. But there are always those at the margin: maybe they will spend more, maybe they won’t. Tax cuts and tax hikes impact these fence-sitters. At any point in time, there may only be a relative few businesses on the fence. Every year, though, some companies will be considering a capital investment and will be sensitive to the tax rate that they would pay on their earnings.

There is certainly room for the economy to grow faster. Faster economic growth is how the Trump administration believes it will pay for these tax cuts.They may be right, but only if the tax cuts remain in place for several years or more.

Here’s how we get room for more growth in an economy with a low unemployment rate. We have many people who are neither working nor actively looking for work. They are not counted as unemployed (because they are not actively job searching), but many of them would take a job if offered one.Word of mouth will get these people to job openings.

Higher wage rates, which would come from greater demand for labor, would induce even more people into the labor force, such as stay-at-home moms and early retirees.