Question

Donald J. Trump’s speechwriters once told him to say something like “my tax cut plan would lead to a larger share of national outcome being used for investment, helping to permanently restore rapid economic growth (per capita).”

Do you agree it would increase the growth rate of GDP help during his presidency? What about raising growth permanently?

Answer 1

First let us understand effect of tax cut on economy and GDP. A decrease in tax rate has boosting impact on income, demand and GDP. When government decreases taxes it increases the disposable income of people. This increase their spending and raises aggregate demand and supply. This gives boost to economy and GDP and lowers unemployment in the economy.

Effect of tax cut by trump on US Economy.

The tax cut by Trump have not shown much positive impact. Following are some of its impact:

• Some financial officers expect that US economy will shrink by second quarter of 2020.
• Others expect a recession by the end of next year.
• It has not shown much positive impact on overall growth, business investment. workers pay as expected.
• Some says that it too early to see its positive impact.
• It has not boosted the investments scene in US as expected.
• The wages of ordinary workers have increased very less as expected.
• Not much of dollars was brought back to US, as it was expected by tax cut.

Reasons for dismissal performance of tax cut:

• Trade war with China is considered by economist as one of the reasons for less positive impact of tax cut.
• There was some growth in the economy as a result of tax cut in 2018 but it did not help much. As the increased demand because of tax cut was limited, because much of tax cut proceeds went to high income household who has low propensity to spend. In present times the strength of economy largely depends on consumer spending.
• As said earlier there was temporarily increase in growth and investment in 2018. But credit is given more to increase in prices of oil that encouraged more domestic production than to tax cut incentives.
• Another reason could be less weightage is given to government tax rates by dominant firms. Because of corporate consolidation such firms with high profit margins are free to choose about their investment projects.
• In present scene corporate tax cuts have become less effective for boosting investment due to rising market powers.

After analyzing the above points we can say that economic growth not only depends on tax cut. So, we can say that tax cut is an effective solution to boost GDP and economy. Infact, tax cut reforms seems to be applied judiciously and need some repair, so that they can show a positive picture of economy.