Extending Trump tax cuts won’t do much for the economy, CBO says

They say they want to fulfill a promise made by President-elect Donald Trump and avoid burdening the economy with higher taxesRepublicans in Congress plan to extend individual tax cuts passed in 2017 that expire at the end of 2025, which would result in more than $4 trillion in lost revenue over 10 years. But a new analysis from the Congressional Budget Office raises questions about the economic value of extending the tax cuts, concluding that doing so would do little to boost growth compared to phasing out the tax cuts as scheduled, while leading to a slightly smaller economy in the long run.

The tax increase resulting from the expiration of the 2017 tax cuts — which primarily affect individual tax rates, but also includes provisions related to small business, estate taxes, and state and local tax deductions (see here). Summary from Brookings for a complete list) — would slow economic growth, CBO said, as real gross domestic product would be 0.1% lower on average from 2025 to 2034, due in large part to a reduction in total working hours due to higher taxes.

At the same time, higher taxes lead to higher federal revenues, reduce government borrowing, and reduce deficits by $3.7 trillion over ten years. In the long run, lower government debt leads to lower interest rates and higher private investment, which increases the growth rate.

Overall, the effects essentially cancel each other out, CBO said. And by 2034, the economy would be slightly larger if the tax cuts expired compared to if they were extended. “In CBO’s current economic forecast, the expiration of individual income tax provisions slows potential GDP growth in the near term but accelerates it in 2029 and beyond as inflows from smaller deficits offset declines in labor supply,” CBO said. “The expiration increases long-term potential GDP growth by approximately 6 basis points.”

The political battle ahead: The CBO analysis is not expected to slow Republican efforts to extend the 2017 tax cuts. The biggest hurdle for Republican lawmakers may be the cost of the extension. However, these can easily be avoided by simply changing the accounting basis for the extension from “current law,” which assumes the tax cuts expire, to “current policy.” ” which includes the tax cuts in their current form — a legal maneuver that would reduce the price to $0.

Still, the CBO report provides ammunition to those opposed to extending the tax cut. Senate Budget Chairman Sheldon Whitehouse said: “The looting has begun.” opinion Highlighting the analysis. “Instead of sparking record-breaking growth, the next Trump tax scam will deprive hardworking families, shrink our economy and blow a $4.6 trillion hole in the deficit,” he said.

Richard Phillips, Sen. Bernie Sanders’ tax policy director, noted on social media that the CBO analysis undermines Republicans’ argument that tax cuts always stimulate the economy and usually pay for themselves. “The best economic evidence shows that Trump’s tax cuts will reduce economic growth, not increase it,” he said. “The idea that growth will finance tax cuts isn’t even trend-setting.”

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