News Analysis

Republicans' tax cuts will spur only short-term growth

WASHINGTON - The business sector has welcomed the passage of the Republican Party's US$1.5 trillion (S$2.02 trillion) tax cut Bill, that will likely spur a quick growth dividend and provide a boost for President Donald Trump and the Party.

Republican Senators and Congressmen will be able to tell their constituents when they go back home for Christmas, that they achieved a landmark piece of legislation which will put more money into the pockets of the middle class.

But while Mr Trump and key Republicans held a self-congratulatory media event at the White House following the passage of the Bill through Congress, not all of America was quite as enthused.

"The Republicans will benefit politically from having achieved their stated goal of tax reform," H.W. Brands, professor of history at the University of Texas in Austin, wrote in an e-mail to The Straits Times. But he added "The economic effects of the new law itself are far less certain. There might be a bounce in the stock market. But as to stimulating broader growth, that is less likely."

The public is cynical. Under the Bill, tax cuts for the middle class are temporary but for corporations, they are permanent. A new poll from NBC News and the Wall Street Journal shows that 63 per cent believe that the tax cut is designed to help corporations and the rich.

Many analysts agree. "The tax Bill does make an attempt to help people at the lower end," Ms Maya MacGuineas, president of the bipartisan non-profit Committee for a Responsible Federal Budget, said in a phone interview.

"But tax cuts will give much greater benefits to the well-off because they pay more in taxes, and also because corporate tax reforms will benefit the economy in a way that's more likely to go to capital owners, who are the wealthy."

"It is likely to help grow the economy, and it is likely to succeed in keeping more corporations from going overseas and to help our competitiveness," she said.

"But it is highly unlikely to create enough growth that the numbers come in as high as advocates say it will. Debt will be higher. It will be a short term jolt to growth but it won't last and it will be bad for debt over the medium term."

The debt, analyst say, is the untold half of the story. "They talk about this being a generational reform but the bill is going to the next generation," Ms MacGuineas warned.

The way President Trump had sold the Bill, and Speaker Paul Ryan and majority leader Senator Mitch McConnell kept deficit hawks at bay, was creditable, Republican strategist and commentator Evan Siegfried told The Straits Times.

The Republicans needed a win to help keep their base from walking away, he said. There were plenty of talking points in the Bill. The middle class would be thrilled with the cuts.

"But there are going to be people who are furious that tax cuts for the corporations are permanent and for the people temporary," he warned. "And it will further anger an already angry Democratic base that is organising itself."

Added Ms MacGuineas : "I think we'll see some pretty high growth for one year but things will look very different 18 months or two years from now."

"But a lot of other things will have happened in between. Fans of the tax cuts will say it's not related to the tax cut, critics will say it's because of it. And they will continue to fight," she said.