Tags: Larry Kudlow | Donald Trump | economy | stocks

Larry Kudlow: Congress Needs to Use 3 Percent Growth Forecast for Tax-Cut Estimates

By    |   Tuesday, 24 October 2017 02:46 PM

Larry Kudlow, the Reagan administration economist who also advised the Trump campaign, said he’s worried that the House of Representatives isn’t estimating how fast the U.S. economy will grow if taxes are cut.

The lower growth forecast may mean lawmakers won’t approve some cuts, such as for corporate tax rate.

“I’m hearing, for example, they may not use a 3 percent growth baseline, which is worth several trillion dollars,” Kudlow said on financial news channel CNBC. “That they will use a Joint Tax Committee baseline which means no dynamic scoring – will cost them a fortune. The only way they can get this done is a 3 percent growth path, the mother of pay-for’s.” Dynamic scoring is a tool to give members of Congress the information they need to evaluate the tradeoffs in tax policy changes.

Kudlow said political cycles make the tax cut very viable during President Donald Trump’s administration. As a candidate, Trump pledged to cut taxes, reduce burdensome regulation and to spend a trillion dollars on roads, bridges and airports.

Speaker of the House Paul Ryan said Tuesday that the House aims to pass a tax reform package by the week of Thanksgiving with the goal of getting the legislation out of Congress by the end of the year. This is the first week back for House lawmakers after they were on recess from Capitol Hill last week. 

Cutting corporate tax rates, it is argued, will boost company profitability and help to drive stock-market gains. Treasury Secretary Steven Mnuchin last week warned Congress that stocks will plunge if tax cuts aren't approved. The Dow Jones Industrial Average has risen 29 percent to record highs in the past 12 months.

A key question is whether tax cuts will spur economic growth so much that the government will end up collecting higher revenues, as supply-side economists like Art Laffer have argued, or only add to the federal debt of about $20 trillion. Presidents George W. Bush and Barack Obama both oversaw about a doubling in taxpayer debt for wars and social programs in each of their eight-year terms.

David Stockman, who was the director of the Office of Management and Budget under President Ronald Reagan, last week said Mnuchin's claim that the tax cut will pay for itself is unrealistic.

“Really, I think the guy is clueless. I think the notion that we are going to have a big, big tax cut is a pipe dream. They can’t pay for it,” Stockman told Fox Business Network.

The Congressional Budget Office and the Joint Committee of Taxation score legislation to measure its effect on tax revenue. In the current debate about tax reform, many of the complaints about the CBO focus on its estimate for an economic growth rate of less than 2 percent, while proponents of major tax cuts insist their proposals will produce growth of 3 percent to 4 percent.

Trump has made 3 percent economic growth a key part of his administration's bar for success.

Goldman Sachs this week warned that U.S. economic growth will stall at 1.5 percent while the rest of the world will expand at a 3.9 percent annual clip.

The U.S. economy probably expanded at about a 2.5 percent annualized pace in the third quarter, restrained in part by the effects of two hurricanes. The Commerce Department will publish its first estimate of third quarter growth on Friday.

The department estimated the economy grew 3.1 percent during the second quarter – the last quarter for which statistics are available.

The New York Federal Reserve scaled back its estimates of U.S. gross domestic product growth for the third and fourth quarter as Hurricanes Harvey and Irma hurt home construction and industrial output in September, Reuters reported.

The regional central bank’s “Nowcast” model calculated the economy was expanding at an annualized pace of 1.46 percent in the third quarter, slower than the 1.70 percent rate calculated a week ago. It estimated GDP is growing at a 2.61 percent clip in the fourth quarter, down from 2.91 percent a week ago.

Elsewhere, the U.S. economy is on track to grow at a 2.7 percent annualized pace in the third quarter, even as data showed home construction fell to a one-year low in September, the Atlanta Federal Reserve’s GDPNow forecast model showed last week.

The latest estimate for third-quarter gross domestic product growth was unchanged from the rate calculated on Oct. 13, the Atlanta Fed said.

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Larry Kudlow, the Reagan administration economist who also advised the Trump campaign, said he's worried that the House of Representatives isn't estimating how fast the U.S. economy will grow if taxes are cut.
Larry Kudlow, Donald Trump, economy, stocks
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2017-46-24
Tuesday, 24 October 2017 02:46 PM
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