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November 20, 2017

The Coming Tax-Cut Boom

Economy: To hear some political pundits speak, you'd think that tax cuts now being proposed in both the House and the Senate will only benefit "the rich." In fact, the economic benefits will be broad and deep.

The proposed Tax Cut and Jobs Act now making its way through both houses of Congress will slash taxes by some $1.5 trillion over 10 years.

How much bang for the buck does that give? Quite a lot, according to a new Heritage Foundation forecast.

"The Tax Cuts and Jobs Act would lower the cost of capital and increase after-tax wages, which would increase the capital stock and number of hours worked, both of which would cause an increase in GDP," wrote Parker Sheppard and David Burton at the Daily Signal website.

For instance, investment in capital equipment is forecast to grow 4.6% in the Senate bill, 4.9% in the House bill. (They're different because the Senate and House tax-cut plans, while similar, are not yet identical).

Capital investment in structures — factory buildings, mini-malls, homes, warehouses and the like — would rise 9.1% (House bill) to 10.9% (Senate bill). Hours worked, a key component of GDP, grows by 0.7% under either plan.

Actual GDP will by permanently higher by anywhere from 2.6% (House) to 2.8% (Senate). The point is, both bills, though widely criticized and certainly not perfect, are economic-growth bills. They will expand the economy, and make a big difference for average households.

How big a difference? Annual GDP per household will be permanently higher by an inflation adjusted $4,098 under the House bill, and $4,403 under the Senate bill. These are significant boosts to household incomes after nearly two decades of stagnation in median real incomes, and would go a long way toward ending the early 21st century economic malaise that began after the dot-com boom went bust.

By the way, these forecasts weren't an act of partisan accounting; Heritage's calculations are based on numbers from a highly-respected and widely-used economic model.

The point is, these tax cuts will bring about broad-based economic gains that will affect Americans across the board. First Trust Advisors economist Brian Wesbury on Friday likened the political process of tax reform to sausage making. Yet, he noted, "the ingredients in the final bill — be it the House or Senate version — will boost economic growth and corporate profits."

We would add, this latest study is also in line with the findings of the nonpartisan Tax Foundationand the Council of Economic Advisers. The point is, the magic missing from our economy in recent years has been growth. Average 2% GDP growth over the past decade is substandard. Restoring our historic path of 3% growth is within reach.

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