Question

President Trump promised many times that he would revive the economy through tax reform. His theory is that lower taxes on interest income would encourage people to save more of their income and that this would lead to higher rates of investment and faster economic growth both during his presidency and long afterward as a legacy.

Briefly evaluate this theory using the Solow model as an organizing framework.

Answer 1

The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.

Tax brackets in the year 2015

$0	$9,225	10%
9,225	37,450	15%
37,450	90,750	25%
90,750	189,300	28%
189,300	411,500	33%
411,500	413,200	35%
413,200	--	39.6%

Tax brackets in the year 2019-20

10%	$0 to $9,700
12%	$9,701 to $39,475
22%	$39,476 to $84,200
24%	$84,201 to $160,725
32%	$160,726 to $204,100
35%	$204,101 to $510,300
37%	$510,301 or more

The above data clearly shows how taxes have been reduced on interest income (considered as normal income in USA).

Also, United States's Investment accounted for 20.2 % of its Nominal GDP in July 2016, compared with 21 % in July 2019. This data also shows that there has been an increase in investment during President Trump's tenure.

Thus, the trend seen during Trump's tenure confirms with the Solow Growth Model.