US economists divided on Republican tax reform proposals

Economists in the US are split on the economic effects of Republican tax reform proposals, a media report said.

Republicans in the US House of Representatives unveiled the long-awaited bill last week to overhaul the US tax code in decades by significantly cutting corporate income taxes and simplifying the personal income tax system, Xinhua news agency reported.

The bill would cut the corporate income tax rate to 20 per cent from 35 per cent.

Martin Feldstein, a professor of economics at Harvard University and former Chief Economic Adviser of former President Ronald Reagan, praised the tax cut proposal for businesses.

"What will truly matter for the economy is corporate tax reform which will lead to a major increase in capital spending by companies. That in turn will raise productivity and real wages," said Feldstein in an Op-ed for The Wall Street Journal published Monday, the report said.

"These gains start small but will grow year after year as capital flows to corporate investment in the US from the rest of the world and from other parts of the US economy."

With regard to the deficits incurred by tax cuts, Feldstein said, "That boost in future gross domestic product outweighs the adverse effect of the 1.5 trillion dollars increase in the national debt."

The budget resolution approved by the House and Senate last month allows for tax legislation that would increase the federal deficit by $1.5 trillion over 10 years.

The budget resolution also allows Republicans to pass their tax reform plan in the Senate without needing to secure any support from Democrats.

Lawrence Summers, a Harvard economics professor and former Treasury Secretary in President Clinton's administration, criticized the tax reform bill in an Op-ed for the Financial Times published Sunday.

"Unfortunately, the proposal from Republicans in the House of Representatives on offer now may well retard growth, reward the wealthy, add complexity to the tax code and cheat the future even as it raises burdens on the middle class and poor," he said.

"Corporate rate reduction serves only to reward monopoly profits, other rents or past investments. After the trends of the past few years, are shareholders really the most worthy recipients of a windfall?"

Summers said the Congress should return to the 1986 approach of revenue neutral tax reform.

House Republicans currently plan to pass the tax bill by the Thanksgiving week and then send it to the Senate for consideration.

--IANS

amit