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White House: Corporate tax changes would boost GDP

White House: Corporate tax changes would boost GDP
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The White House issued a report on Friday arguing that the corporate tax changes proposed in Republicans’ tax framework would boost gross domestic product (GDP) by between 3 percent and 5 percent in the long term.

The tax changes “move to reduce the tax on capital and stimulate capital formation,” the White House Council of Economic Advisers (CEA) said in the report.

The paper comes days before the Nov. 1 release of the House Ways and Means Committee’s tax-reform bill. It is the second white paper the CEA has released in recent weeks to make the case for cutting the corporate tax rate.

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The House’s bill is expected to closely follow the framework the White House and congressional GOP leaders released in September. That blueprint calls for cutting the corporate rate from 35 percent to 20 percent and allowing businesses to immediately write off the full costs of their capital investments for at least 5 years.

The CEA estimated a 3 to 5 percent increase in long-run GDP, compared to the Congressional Budget Office’s baseline, if the corporate rate is 20 percent and full expensing is permanent.

“Our estimates indicate a 0.5 percent increase over the baseline CBO forecast in year one and a 4.2 percent increase in the long-run steady state,” the CEA said in the paper. “Eliminating full expensing of non-structure assets in year five, however, would reduce the long-run steady state increase in GDP to 3.1 percent. The economy would achieve the higher growth path if firms expect the policy to be continued."

The paper also expands upon the CEA’s analysis in an earlier paper that the proposed corporate rate cut would “very conservatively” increase average household income by $4,000 annually. Some outside analysts pushed back on that paper.

In a call with reporters, CEA Chairman Kevin Hassett said he hoped that corporate tax reform would receive bipartisan support, noting that former President Obama also supported cutting the corporate rate.

“I would hope that those who were for corporate tax reform under a different administration would still support it because the economic fundamentals are still the same,” he said.

The paper comes out on the same day that the Commerce Department estimated that GDP was 3 percent in the third quarter of 2017 — a pace that was greater than expected.

Hassett said that businesses are optimistic because of the Trump administration’s regulatory reforms as well as because they expect a tax cut.

“The thing that I’m worried about is that if those expectations prove to be incorrect, then I would expect business capital spending to go back to its disappointing path and equity markets to decline as well,” he said.

Friday's report was not without its critics.

Marc Goldwein — senior vice president at the Committee for a Responsible Federal Budget, a deficit hawk group — said he saw several issues with the paper. 

He called a 3-percent increase in GDP "a plausible but high-end estimate if you only look at the benefits of cutting the rate to 20 percent, and not any of the costs associated with the financing.”

A corporate rate cut that's financed by deficit sepnding could have a negative effect, and financing a rate cut by eliminating corporate tax breaks could also increase the cost of investment, Goldwein said.

Goldwein also said that it appeared that the CEA was "cherry picking" by including in its paper studies that were favorable about reducing corporate taxes while excluding analyses "that show a more modest effect.” And he added that he thinks the report creates some confusion about when CEA thinks GDP will increase by 3 to 5 percent.

Hassett said that when a complete tax plan is available, changes to the CEA's analysis may be necessary. He also said that if tax cuts generate enough economic growth, they shouldn't significantly add to the deficit.

- This story was updated at 3:02 p.m.