Abstract

ABSTRACT:

We use a cost-of-capital framework to analyze the long-run steady state and transition path for GDP as a result of the 2017 tax law. We predict that, for the law as written, the long-run increase in corporate productivity will be 2.5 percent, which translates into a 0.4 percent increase in GDP after 10 years—or an increase in the growth rate of 0.04 percentage point per year. If the 2019 provisions of the law are made permanent, these numbers are 4.8 percent for long-run corporate productivity, 1.2 percent for GDP after 10 years, and 0.13 percentage point for the increase in the growth rate. We perform a sensitivity analysis, and conclude that if interest rates rose as a result of fiscal crowding out, the 10th-year GDP increases would be 0.2 percent and 1.0 percent for the two scenarios, respectively. We assess the short-run impact of the 2.3 percentage point reduction in average marginal tax rates for individuals under the law. Existing empirical evidence implies that this change would raise the annual GDP growth rate for 2018–19 by 0.9 percentage point per year.

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Additional Information

ISSN
1533-4465
Print ISSN
0007-2303
Pages
pp. 257-345
Launched on MUSE
2018-11-08
Open Access
No
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