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Trump Tax Plan Could Boost Growth And Deficits, Analyst Says

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Cash register.

Americans had until midnight Wednesday to file their taxes this year. Next year, they’ll be filing under the tax cuts signed into law by President Donald Trump.

Montana’s Republican U.S. House Rep. Greg Gianforte is pretty excited about that.

"So I have good news, the tax reform plan that we passed in December is working in Montana," he says.

Since early April, Gianforte has been celebrating the new federal law in what he’s called his "Tax Cuts and Jobs Tour." Talking to businesses in Bozeman, Helena, Missoula, Billings, Great Falls and Shelby, Gianforte says that on the tour, business owners told him they’re starting to invest more in equipment and their employees because of the tax cuts.

For Gianforte the new tax law is all good news. He and other Republicans who voted for the law say economic growth spurred by the cut in individual income and corporate taxes will be great enough to offset its cost to the federal government.

“If we could get just half a percent increased growth, that will completely pay for the tax plan. And anything above half a percent increased growth could be used to reduce the deficit, national defense, infrastructure, schools, however we choose to use it,” Gianforte said.

But Gianforte’s assessment runs counter to the analysis of the tax bill’s impact from the nonpartisan Congressional Budget Office. The CBO says the new law will add about $1.5 trillion to the national deficit over the next 10 years.

Montana’s Democratic Senator Jon Tester voted against the tax bill that both Republican members of Montana’s congressional delegation supported. He agrees with the CBO’s conclusion that the law will increase the federal deficit.

“So I think when you’re talking about the kind of debt this bill creates, it’s going to take an incredible economic growth spurt to be able to pay for that. And we’ve never seen that in the past,” Tester says.

However Tester agrees that, at least in the short term, the tax cuts could cause a positive bump in both the U.S. and Montana economies. But unlike his Republican counterparts, Tester doesn't think those cuts are worth the possible long term impact — that growth in the federal debt that could drive up interest rates for all Americans.

“Because right now they’re very low, and if they start going up it's going to have some real consequences on our budget,” Tester says.

Claims that new federal tax law will boost the economy sound plausible to University of Montana Economist Patrick Barkey.

“You know, if you’re looking short term, it’s a plus,” he says.

Barkey says the law nearly doubles the standard deduction, and brings the corporate tax rate down closer to the rates seen in other industrial countries. But past the short term, positive economic growth is harder to project.

“Because this tax cut has pretty significant medium-term fiscal issues because of its expected impact on the deficit. But the shorter-term numerical estimate is tenths of a point, in terms of growth, which in an economy as large as ours is pretty significant.”

Barkey says the CBO score showing the tax bill will result in an increase in the federal deficit is a reasonable projection. And he says as the deficit increases, the country is exposed to greater financial risk, including rising interest rates and weakening spending power.

The UM economist says there have been very few instances in the past where tax cuts have paid for themselves.

According to the Brookings Institution, the Reagan tax cuts, which were cast in a similar mold as the Trump administration’s, were among those that didn’t pay for themselves. The Brookings Institution concluded that when tax cuts are too big, they’re often followed by tax increases. Although, the country's economic circumstances were much different back then.

While Montana’s congressional delegation generally agrees that Montana’s economy will likely see a bump in the next few years, the future cost and benefit of the tax cuts is still unknown. In the meantime, both Rep. Gianforte and Senator Tester are seeking reelection this year and are using the tax bill, along with their primary challengers, as an occasional platform to brandish images of the future to gain political support.

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