Question

What impact would the tax options proposed by President-elect Trump potentially have on macro equilibrium?

Answer 1

President Donald Trump planned to stir the economy by providing a fiscal stimulus The idea is to boost the economy by following expansionary fiscal policy route such as increase in government expenditure on infrastructure and investment and doing away with regulations affecting business, but the most important is going through massive tax cuts options.
The Tax cuts and Jobs Act of 2017 proposes reduction in corporate tax from 35% to 21% among many things.

The tax reform will have potential impact on macro economy such as:
1. Tax reduction would render more money in the hands of business which would lead to increase in production and consequently increase in Employment ( Employment is estimated to be 0.6% higher during 2018-27 period and the lower marginal tax rate for labor would provide strong incentives to increase in labor supply) [ Joint committee on Taxation]
2. GDP growth rate would be 0.1% each year (Committee for a responsible Federal budget). However, experts suggest that reduction in taxes will only have short term impacts on GDP.
3. Massive tax cuts is estimated to have upward impact on already increased budget Deficit and public debt. It is estimated that due to tax cuts, budget deficits would increase $1 trillion over ten years.

Hence, expansionary fiscal policy by tax reduction is estimated to increase the budget deficit, but economists suggests that increase in GDP, employment, personal consumption also due to tax cuts have the power to offset the increase in debt and deficit that would help to keep macro economy ever strong and on equilibrium.