World Bank Group: Trump's Proposed Tax Cuts Will Boost Economic Growth

Changes to trade or other policies could offset gains

Donald Trump
January 11, 2017

President-elect Donald Trump's proposals to cut taxes on corporations and personal income will boost economic growth, according to a new report from the World Bank Group.

Trump has proposed cutting the corporate tax rate from its current level of 35 percent to 15 percent, with the intention of bringing jobs back to the United States.

The World Bank Group estimates that this cut alone would boost U.S. gross domestic product growth by roughly 0.9 to 1.3 percentage points over eight quarters.

Trump has also indicated he would cut personal income taxes for all Americans, reduce the number of individual tax brackets from seven to three, and change the structure of tax deductions.

The World Bank Group estimated that these cuts would reduce the average tax rate on personal income by about 2.5 percentage points and 7 percentage points for top earners. This potentially would increase GDP growth between 0.4 to 0.6 percentage points after eight quarters of being implemented.

"Taken together, these corporate and personal income tax reforms could—without consideration of additional policy changes by the new administration—raise U.S. GDP forecasts to 2.2-2.5 percent in 2017 and 2.5-2.9 percent in 2018," the report states.

"These estimates depend on the timing of the tax cuts, the reaction of monetary policy authorities, the amount of slack remaining in the U.S. economy, and how businesses and households adjust their expectations to these policy changes."

The fiscal stimulus that Trump is projected to bring could generate faster global growth. The World Bank forecasted that global economic growth will accelerate to 2.7 percent in 2017 after hitting a post-crisis low of 2.3 percent in 2016.

"Fiscal stimulus in major economies—particularly in the United States—could generate faster domestic and global growth than projected, although rising trade protection could have adverse effects," the World Bank says.

Ayhan Kose, an economics prospects director at the World Bank, says that changes to U.S. fiscal policy could have ripple effects to the world.

"Because of the outsize role the United States plays in the world economy, changes in policy direction may have global ripple effects," Kose said. "More expansionary U.S. fiscal policies could lead to stronger growth in the United States and abroad over the near-term but changes to trade or other policies could offset those gains."