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article imageGoldman Sachs — Trump tax cuts will have little effect on growth

By Karen Graham     Oct 10, 2017 in Politics
New York City - The GOP's tax reform plan would only increase economic growth by about 0.1 to 0. percentage points over the next two years, according to a report issued by Goldman Sachs. And any savings would be spent on technology and not on hiring more employees.
President Donald Trump's tax cut plan is supposed to get the economy going again, even though it already is doing well. But in September, the president said: “It's called a middle-class miracle." But while the White House is boasting over how great the plan will be for jobs, growth, and businesses, everyone else doesn't see the same rainbow, according to the Washington Post.
“Our analysis suggests that the ‘dynamic’ cost of the tax cuts is about 20 percent lower than the ‘static’ cost, consistent with the implications of the academic literature,” Goldman Sachs wrote in a Saturday report. However, Republicans argue the $1.5 trillion in deficit-financed tax cuts would pay for itself once growth factors were considered in a "dynamic" analysis.
A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange
A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange
Brendan McDermid / Reuters,
Economic growth under President Obama
The U.S. averaged about 2.0 percent growth for most of the years following the Great Recession under Obama. Trump is promising after his tax cuts an economic growth rate of 3.0 percent or more per year with a prediction of a gross domestic product (GDP) growth rate of 4.0 percent per year.
And even though Goldman Sachs has supplied a number of economic advisers to the Trump administration, they are telling their clients not to expect anything more than some "modest growth" from the tax cuts. Treasury Secretary Steven Mnuchin, a former partner at Goldman Sachs, has gone so far as to predict the tax cuts would increase economic growth enough to eliminate any related deficits altogether.
“We find a boost to GDP growth of 0.1-0.2 [percentage points] in 2018-2019 and smaller amounts in subsequent years, consistent with our existing estimates,” the Goldman Sachs analysis stated. "The effect occurs mostly via the positive impact of a lower corporate tax rate on business investment and personal consumption, with personal income tax cuts much less powerful,” it added.
House Speaker Paul Ryan unveiled the Republican tax plan on Capitol Hill Wednesday
House Speaker Paul Ryan unveiled the Republican tax plan on Capitol Hill Wednesday
What about those tax savings?
The White House has been saying the tax cuts would pay for themselves by spurring investments and creating more jobs. Reuters got in touch with 100 of the largest companies in the benchmark Russell 2000 index of U.S. small and mid-cap stocks as well as another 50 in the Russell 2000 with no analyst coverage.
Of the companies responding to Reuters' inquiries, not one of them mentioned hiring more workers. Instead, the companies said they plan on spending on technology that would increase productivity or making acquisitions.
“We want to be a company of the future, and technology is one of the key ingredients,” said Keith Cargill, chief executive at Dallas-based Texas Capital Bankshares Inc. Cargill mentioned the tax cuts would be a “huge plus” for earnings but they don't expect to increase their workforce.
The meeting is the first Group of Seven (G7) outing for Steven Mnuchin  Trump's Treasury Secret...
The meeting is the first Group of Seven (G7) outing for Steven Mnuchin, Trump's Treasury Secretary and a former Goldman Sachs banker tasked with delivering the US economic agenda
Interestingly, the tax cuts would also have an impact on companies that don't pay taxes, either because they are not yet profitable or are using losses to offset any tax bills. Paul Auvil, the chief financial officer at cybersecurity company Proofpoint Inc, said that with the $4 billion market cap, the company expects to start paying taxes in 2021 when it no longer will be able to offset past losses.
However, Auvil said the corporate tax rate would have to be below 27 percent or they would move their intellectual property to an offshore company in Europe because of the lower tax rates. “These are jobs that have every reason to be in the U.S. but it will require tax reform.”
Tom Forte, an analyst at New York-based D.A. Davidson, suggests that if the tax cut package does pass, large companies will buy back their stock while smaller companies will reinvest in their businesses. “These companies are going to take every incremental cost savings from a tax cut and invest it to keep up with the Amazons and Ubers,” Forte said.
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