Economists See Little Magic in Tax Cuts to Promote Growth

If one assumption has undergirded Republican economic policy for decades — and is the foundation of the Trump administration’s first budget proposal — it is that tax cuts will unleash fantastic growth.

The basic idea is that shrinking the government’s share increases what people take home, encouraging workers to work more and investors to invest more. But while taxes can create incentives that can promote growth, liberal and conservative economists alike said there was no evidence that the White House budget announced on Tuesday would do so.

“The assumed effects on growth are just huge and unwarranted,” said William G. Gale, a co-director of the nonpartisan Urban-Brookings Tax Policy Center and a former economic adviser to the first President George Bush.

The Trump administration promises to cut taxes, keep revenues steady and crank out average annual economic growth of 3 percent, but neither the budget nor the tax reforms previously outlined in sketchy form provide enough detail to figure out if that will happen.

While the United States cruised along with 3 percent growth — and higher — in the late 1990s and mid-2000s, growth has not reached anywhere near that level since well before the recession. The best showing in the past decade was in 2015, when the annual rate of expansion hit 2.6 percent.

In 2016, the economy expanded at an annual rate of 1.6 percent, the weakest performance in five years. Even as economies in Europe and Asia show signs of life after years of stagnation or outright recession, expectations for faster growth soon in the United States have ebbed. Both the Federal Reserve and the Congressional Budget Office have projected a pace of less than 2 percent in the long run.

Since mid-March, yields on the benchmark 10-year Treasury bond have fallen from 2.62 percent to 2.28 percent on Tuesday, a sign that traders are discounting the likelihood of a sudden pickup in growth.

An analysis of Mr. Trump’s tax plan by the bipartisan, nonprofit Committee for a Responsible Federal Budget estimated that the federal debt would rise by $5.5 trillion over the first decade. Even if lower taxes encouraged people to save and invest more, the huge government deficits created by the budget would crowd out private investors and offset some of those direct effects, several economists said.

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Author: PATRICIA COHEN and NELSON D. SCHWARTZ