How Proposed Trump Tax Cuts Will Affect the U.S. Economy

New Study Analyzes the Impact Trump's Tax Plan Could Have on the Federal Deficit

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Critics of Trump’s plan to significantly reduce business and personal taxes warn that the cuts will send the deficit skyrocketing by dramatically shrinking federal revenues while Trump boosts infrastructure and military spending.

But the impact of Trump’s tax cuts will be totally between the historical ditches and should not elicit so much angst and fear, according to a new study by economists at Deutsche Bank AG.

In fact, the report says, their impact will be in line with that of tax cuts made by two other Republican Presidents, Ronald Reagan and George W. Bush.

Trump proposes to lower income taxes and reduce the number of tax brackets from seven to three — 12 percent, 25 percent, and 33 percent. Taxpayers earning up to $37,500 and married filers earning up to $75,000 would pay 12 percent. Single filers making $37,500 to $112,000 and married filers earning $75,000 to $225,000 would pay 25 percent. Earnings above those levels would be taxed at 33 percent.

He also wants a larger standard deduction — $30,000 for married filers, up from the current $12,600, and $15,000 for single filers, more than double the current $6,300. But Trump would also eliminate the current $4,050 personal deduction that filers may take for themselves, their spouse and each dependent.

According to the Tax Policy Center, if Trump’s plan becomes law, the average family in America would see their effective or overall tax rate reduced by about 2 percent.

 

Deutsche Bank concludes that if Trump’s proposed cuts are enacted, the federal deficit would rise from the current estimated 3.2 percent of GDP to 3.5 percent in the initial years of the Trump administration. That would represent a $100 billion revenue reduction to the U.S. Treasury. That’s not insignificant but it won’t put Uncle Sam on food stamps.

Federal tax revenues were 17.5 percent of GDP in 2016. Under the Trump proposal, they would dip to around 17 percent. That’s a bit higher than in 2004-2007, the period following George W. Bush’s reduction in marginal tax rates. After the Reagan tax cuts of 1981-1985, federal revenues were 17.8 percent of GDP.

Trump’s tax policies could still have a notable impact on the economy, perhaps spurring significant growth. The Deutsche Bank study doesn’t consider possible economic multipliers created by Trump’s plan, such as new spending prompted by lower marginal rates, and the extent to which businesses might expand more aggressively in a lower-regulation climate. By way of example, Bloomberg News notes that Trump’s plan to allow manufacturing companies to immediately expense their capital investments could lead to a large increase in corporate spending.