Tax Plan Seen Boosting U.S. Growth a Bit While Denting Housing

President Donald Trump’s planned tax overhaul is likely to boost U.S. economic growth by about a quarter percentage point in 2018, yet it will also dent demand for housing and fail to lower the chances of a recession, according to a Bloomberg News survey.

Three-quarters of 33 economists responding from Friday to Monday expect Congress to pass a version of the House tax bill announced last week. Of those expecting passage, all 22 responding predicted some boost from the $1.5 trillion, 10-year proposal, with gains ranging from 0.05 to 0.9 percentage point and a median of 0.28 point.

Trump and congressional Republicans have pledged to cut taxes and overhaul the system with the goal of pushing up U.S. growth to 3 percent annually, compared to an average of 2.2 percent since the last recession ended in mid-2009. House lawmakers began deliberating on the proposal in committee sessions Monday.

“A $150 billion net stimulus is money that will go in and stoke the economy’s engines somewhat,” said Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. At the same time, “forecasts for growth reaching to 3.5 to 4 percent are a million miles out of reach.”

House Republicans unveiled the tax plan last week that cuts the corporate tax rate to 20 percent from 35 percent, doubles the standard deduction for individuals, consolidates individual rates from seven to four brackets and reduces or eliminates some loopholes or deductions.

Faster Growth
“We are convinced that this is going to give us faster economic growth,” House Speaker Paul Ryan said Sunday.

Most of the economists surveyed agreed, though some said the stimulus package is poorly timed as the economy is in the ninth year of an expansion, with U.S. unemployment falling last month to 4.1 percent.

The economists were split on whether the program would reduce odds of a recession over the next two years. About a fifth found it increased the chances, while almost half expect reduced odds and the remainder saw no impact.

“There are downsides to this much stimulus this late in the cycle,” said Gregory Daco, Oxford Economics’ chief U.S. economist. “You will get a temporary spike in demand, and after that you could get more inflation and a more hawkish Fed. The Fed will react accordingly and you run the risk of cutting off the recovery.”

Sixty-three percent of the economists said the plan will reduce consumer demand for home purchases. It would cap the mortgage-interest deduction on new home sales at $500,000 — a departure from the current cap of $1 million for couples filing jointly.

Prices Hit
Mark Zandi, chief economist with Moody’s Analytics Inc., has estimated the change could reduce housing prices by 3 percent to 5 percent, and the National Association of Realtors has estimated as much as a 10 percent drop in home values.

“It really cuts both ways on housing,” said Robert Dye, chief economist at Comerica Inc. in Dallas. “A return of money to lower and middle-income households and a boost in household confidence are good things for housing. The flip side is fewer people will qualify for the mortgage deduction.”

He said an actual decline in prices is unlikely, though some areas with high-priced homes such as the Northeast and California could be hurt.
Source: Bloomberg