Moody’s Says Tax Cuts Will Not Help US

Proponents of the house and senate Republican tax cut bills argue that the cuts will energize the US economy, increasing GDP by at least 2% to 3% annually, but Moody’s Analytics says neither plan “would meaningfully improve economic growth, at least not on a sustained basis”.

The reason: Since the economy is operating at full employment, the fiscal stimulus from the tax cuts would result in stronger inflation and higher interest rates, which would erase the benefit of lower corporate tax rates, targeted to drop from 35% to 20%. That would leave the economy “no bigger than it would have been without the tax cuts,” according to Moody’s, New York-based ThinkAdvisor.com reported.

The house plan would increase annual GDP growth from 2% to 2.03% over the next decade, Moody’s analysts write. The analysts base their conclusions on the following:

The tax cuts would increase GDP growth by 30 basis points, or 0.30%, in 2018, adding half a million jobs and pushing unemployment below 4%. Since that’s below the 4.5% rate that the Fed believes is consistent with stable inflation, the Fed will respond by raising short-term rates more aggressively. Long-term rates would also increase because of expectations of bigger budget deficits.

Analysts are slightly more optimistic about the economic benefits of the senate plan, which delays the corporate tax cut until 2019. They forecast an annual 10 basis-point increase in GDP growth in 2018 and 2019 but only a 4 basis point annually overall for the next decade.

In addition to having little impact on economic growth, both the House and Senate tax plans would “significantly exacerbate the nation’s fiscal problems,” according to Moody’s. The plans would add roughly $1.5 trillion to the deficit over 10 years, driving the debt-to-GDP ratio up from 75% currently to 100% a decade from now.

Debt-to-GDP ratio is expected to rise to 95% in 10 years even if there were no change in tax policy but that still doesn’t justify the tax cuts because any increase in the debt load is “bad policy”, according to Moody’s.

The analysis also finds that housing prices will decline as a result of the tax cuts because of changes to state and local property tax deductions. “The hit to national house prices is estimated to be as much as 5%,” with an even greater impact on higher priced homes, according to Moody’s.