The net effect of the Republican tax proposal introduced in late September is more debt with little to show for it, according to an analysis by economists at Moody’s Analytics led by Mark Zandi.
Building on an earlier analysis by the Tax Policy Center, the Moody’s economists found that over the 10 years from 2018 through 2027, the Republican plan would cost $2.4 trillion in reduced revenues and increase interest rates but add only 0.04% annually to GDP.
Payrolls would rise slightly and the unemployment rate would inch lower, but the stock market would be flat except for a 4.8% gain in 2018. The 10-year Treasury rate would rise 74 basis points annually over the 10 years through 2027, and the federal funds rate would increase 30 basis points — both having the effect of slowing growth.
The federal deficit would increase to over 5% of GDP from about 4% currently and the total debt to GDP ratio to 93.5% from 85% currently. In addition, increased government debt issuance to finance the deficit would crowd out some private corporate debt.
“The plan doesn’t do much for the economy,” said Mark Zandi, chief economist at Moody’s Analytics during a webinar focused on the potential impact of the plan.
It does however, do a lot for corporations, whose top marginal tax rate would drop to 20% from 35% and who would be able to deduct business expenses immediately rather than over several years.
Multinational companies would benefit from changing the current global system to a territorial system for taxing foreign earnings, essentially moving from taxing foreign-source income when it is repatriated to the U.S., with a credit for foreign income taxes already paid, to one where companies only pay taxes on income earned in the U.S.
But the accelerated deduction for business expenses as soon as they’re incurred, known as immediate expensing, ends after five years and the plan itself sunsets after 10 years, in order to qualify for Senate passage with a simple majority rather than two-thirds of the vote, which also limits its effectiveness.