I joined Business Insider Editor-in-Chief Henry Blodget on this week’s episode of The Bottom Line.
We discussed the pros and cons of President Trump’s proposed tax cuts, which would slash income tax rates on businesses from 35% to 15%.
Most economists will tell you that lower business tax rates tend to lead to higher economic growth and higher job creation. However, they disagree widely on how much higher. Meanwhile, such a large tax cut would add trillions of dollars to the federal debt over a decade, and more government debt tends to reduce economic growth.
One major problem with Trump’s proposal is that, due to procedural rules in Congress, any Republican tax reform will likely have to be written to be temporary — much like the Bush tax cuts, which were scheduled to expire 10 years after their enactment.
The way business tax cuts spur job growth is by promising investors that they will enjoy a lower tax rate on the income from new investments they make. This should encourage more investment in business capital — machines, buildings, and other assets that ultimately will require workers to put them into use.
But if a tax cut is temporary, that is less effective for encouraging business owners to make new investments. Instead, they are likely to simply enjoy the temporary tax break on income from investments they made in the past, without necessarily creating new jobs.
This is a reason to believe any major business tax cut under President Trump would do a lot to grow the deficit, and not very much to grow the economy.