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Commentary By Emily Top

Tax Reform Needed for Continued High GDP Growth

Economics Tax & Budget

The economy is picking up steam. Real GDP in the third quarter grew by an annual rate of 3.0 percent, the first time since 2014 that real GDP has grown at a rate above 3 percent for two consecutive quarters.

This rate outpaced many expectations. According to Bloomberg, real GDP was estimated to only reach 2.6 percent because of the hurricanes. However, the Commerce Department has warned that the GDP numbers may not fully capture all the losses. Future estimates of third quarter GDP may shift as a result of incorporating all the losses as well as including September import and export data. The next estimate for real GDP is scheduled to come out November 29.

Looking forward to the fourth quarter, it is quite possible that this impressive growth will continue. Reconstruction and rebuilding after the hurricanes can be expected to boost economic activity in the fourth quarter. In addition, we can anticipate that consumer spending, especially in services, will rebound as well.

If the United States is able to maintain 3 percent growth in GDP for three quarters in a row, it would show real improvement on prior years.  The last time GDP grew over 3 percent for three quarters in a row was over ten years ago, between Q3 in 2004 and Q1 in 2005. In order to accomplish this, it will be important to continue to work toward policies that foster economic growth.

Tax reform is one area that has the potential to boost GDP.  The Tax Foundation modeled the business-side tax reforms, including corporate tax rate cuts and full expensing, and found large increases to GDP. The Tax Foundation’s models indicated that corporate tax cuts alone would boost GDP by 3 percent, and combined with full expensing, GDP would rise by around 4.5 percent.

Kevin Hassett of the White House Council of Economic Advisers (CEA) argues that low capital stock growth and negative capital deepening during the Obama administration has pushed firms abroad. Tax reform would foster the continuation of the recovery by encouraging firms to increase capital deepening domestically, resulting in higher productivity and wages for American workers and economic growth. The latest report from CEA estimates that reducing taxes will lead to between 3 percent and 5 percent growth in the economy. 

Regardless of the results modeled in reports, the current tax structure is hurting businesses. According to the 2017 Small Business Taxation Survey from the National Small Business Association, 30 percent of surveyed businesses indicated that they spend between $1,001 and $5,000 on the administration of federal taxes, not including taxes owed. In addition, 20 percent of businesses indicated that they spent more than 120 hours dealing with federal taxes. By simplifying and reducing the current tax code, small businesses could increase their productivity by focusing their efforts on their businesses, in turn boosting GDP.

The administration and Congress could further encourage GDP growth by continuing to reduce the regulatory burden on businesses. Rules put in place during the Obama administration have raised the cost of doing business.

The Trump administration has already put a stay on some of these rules, including the EEOC’s new EEO-1 form. This form increased the number of data points on the form from 180 to 3,360. The expansion of the form would have added burdensome bookkeeping for employers, which takes away from company productivity.

The Trump Administration also has been slowing the implementation of new rules. Between Inauguration day and the end of May, the Office of Information and Regulatory Affairs had only approved 15 regulations, as compared to 93 under Obama and 144 under Bush over the same period. Since then, Trump has continued to call for reforming regulation. The administration should continue this policy of rolling back unnecessary and burdensome regulations and slowing the implementation of new rules that discourage productivity and investment by companies.

The growth in GDP that we have seen thus far has been notable. Experts seem hopeful that this can continue into the next quarter, but it is not a sure thing. The Atlanta Federal Reserve currently estimates 2.9 percent growth in the fourth quarter, but policy can change this. By removing policies that deter productive economic activity and by promoting pro-growth reforms, another quarter of 3 percent growth may be within reach.

 

Emily Top is a research associate at Economics21.

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