Unexpectedly Intriguing!
02 May 2017
Mnuchin-Cohn Press Briefing, 26 April 2017 - Source: White House - https://youtu.be/TTlkX41zuhQ

On Wednesday, 26 April 2017, U.S. Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn held a press briefing where they released a one page outline describing what the basic elements of what tax reform under President Trump would look like.

So far, the best description of what's in the plan that we've seen was put out by Goldman Sachs (you can read their analysis here via ZeroHedge). As for how much taxes would be cut, the Committee for a Responsible Federal Budget (CRFB) has very roughly estimated from the White House's rough outline for tax reform that the federal government's total tax revenue over the 10 years from 2018 through 2027 would be $5.5 trillion less than what the Congressional Budget Office currently projects, or on average, about $550 billion per year, which might be considered to be the actual "size" of the estimated tax cut.

Dan Mitchell, who isn't particularly enthusiastic about the White House's proposed tax reform, was quick to point out that the CFRB's estimates should be considered to be "very inaccurate because they are based on 'static scoring,' which is the antiquated notion that major changes in tax policy have no impact on economic performance."

More accurate results could be realized by using "dynamic scoring" method, which incorporates estimates of the effect the impact of changes in tax policies will have on incomes, employment, investing and other economic factors before tallying the overall fiscal impact to the government's revenues, but that more complex analysis takes time to produce. Nonpartisan think tanks like the Tax Foundation and the Tax Policy Center have developed their own methods of performing this kind of more dynamic analysis, but as of this writing, neither has produced any updated assessment of President Trump's proposed tax reform based on the information released at the Mnuchin-Cohn press briefing.

The Multiplier Effect

Fortunately, we've developed a back-of-the-envelope method that might be used to assess how the nation's GDP might change in response to changes in the government's fiscal policies, one that proved to be remarkably accurate when applied to changes that were actually implemented in Greece, Spain and also for the U.S., which takes the GDP multiplier effects for changes in government spending or taxes, or even quantitative easing by the Federal Reserve, into account.

What we've done is set up a tool to do the GDP multiplier math for what little anyone knows of what President Trump's tax reform will actually work out to be below, where we've plugged in the CBO's latest forecast for nominal U.S. GDP in 2017 ($19,200 billion) as our starting point for measuring its impact to the U.S. economy, which we'll estimate the level that U.S. GDP would be after one year as a result of the proposed tax reform. While the default data assumes no change in the federal government's planned spending and also no contribution from the Federal Reserve through quantitative easing (or tightening) policies, you're more than welcome to enter values you think are appropriate into the following tool to see what impact they might have, or to alter the amount of the tax cut during its first year to match whatever value might be appropriate after the change in U.S. tax policies become more well defined.

We're also assuming zero additional economic growth for first year that the tax reform might be in effect, which we'll discuss more in our analysis below the tool. Speaking of which, if you're reading this article on a site that republishes our RSS news feed, please click here to access a working version of this tool at our site!

GDP and "Input Shocks"
Input Data Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal Government Spending [billions]
Federal Reserve Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)
* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5% (as it is in the U.S. in May 2017!)

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

What we find with our default data entries is that a $550 billion tax cut could potentially increase the U.S. GDP by up to $1,650 billion (or $1.65 trillion if you prefer bigger sounding numbers) above what it would otherwise be after one year of being in effect. In boosting nominal GDP from the CBO's projected $19,200 billion in 2017 to $20,850 billion a year later, the proposed tax reform would appear to have the potential by itself to boost the United States' nominal GDP growth rate by over 8%, which works out to a real year over year GDP growth rate of about 6% after accounting for the CBO's projected rate of inflation.

In reality, it won't be that large because the tax reform proposal combines tax cuts, which can take up to a year or more for their stimulative economic benefits to fully materialize, with some measures that would increase tax revenues in the short term, such as the elimination of the federal deductibility of state and local income taxes for high income earners, which would have an immediate but negative effect that would offset some of the full potential to realize the indicated economic growth.

There are also other factors that will affect the net stimulative effect of the tax reform proposal, the most significant of which is the U.S. economy's "organic" or "inertial" economic growth, which can be thought of as how much GDP would change without any changes in U.S. fiscal policies or in the Federal Reserve's monetary policies that might affect it. The CBO is currently projecting that nominal GDP would grow organically by $700 billion from $19,200 billion in 2017 to $19,900 billion in 2018 (a 4% nominal growth rate), which if that projection holds, would put U.S. nominal GDP at $21,550 billion (or $21.550 trillion) for a total 12% nominal GDP growth rate when the boost from the tax reform is added on top of it.

The CBO also projects that there won't be any recessions that might produce negative economic growth at any time during the next 10 years, so be sure to take its GDP projections with that large grain of salt.

The other wildcards that could affect the future GDP after a Trump tax reform would be changes in federal government spending and whatever the Federal Reserve decides to do with its plans to hike interest rates or to send its quantitative easing programs into reverse (aka "quantitative tightening") as it seeks to shrink its balance sheet. At present, nobody has any idea of what those numbers for 2018 might be.

The good news is that our back-of-the-envelope math can handle those factors - you would just need to enter the numbers in our tool as they become known. As for the math we've used, here are our references for the various GDP multipliers that we've used to create this quick dynamic scoring analysis tool.


Owyang, Michael T., Ramey, Valerie A. and Zubairy, Sarah. Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data. [PDF Document]. Federal Reserve Bank of St. Louis. Economic Research Division. Working Paper 2013-004A. January 2013.

Romer, Christina D. and Romer, David H. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. [PDF Document]. March 2007.

Political Calculations. Input Shocks, GDP, Multipliers and QE. [Online Article and Tool]. 4 June 2013.

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