Is This The Right Time For a Big Tax Cut? The rationale behind the GOP tax plan is that the economy needs stimulus. But it's already growing and near full employment. And the plan could be undercut by the Fed as it raises interest rates.

Is This The Right Time For a Big Tax Cut?

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Republicans are smoothing out the details of their tax overhaul legislation. They're hoping for final passage this month. They say the changes will lead to more jobs, more investment. Most economists, though, are questioning the timing. They say the U.S. economy is already at near-full employment, and pushing for faster growth in 2018 could backfire. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: It sounds like an admirable goal. Grow the economy. Create more jobs. Surely no one could object to that. But in the opinion of some economists, a tax cut is the last thing the U.S. needs right now. For one thing, the economy has been growing steadily for years. Growth last quarter was a healthy 3.3 percent. Unemployment is down to 4.1 percent. Jared Bernstein of the liberal Center for Budget and Policy Priorities (ph) says this isn't the time to be thinking about a tax cut. For one thing, there's the impact it will have on federal borrowing.

JARED BERNSTEIN: I think the timing of this tax cut from the perspective of the deficit is completely upside down.

ZARROLI: Bernstein says he no deficit hawk, but he says when the economy is growing, common sense says you should be paying off some of your debt.

BERNSTEIN: It's that simple, you know? What are you supposed to do with your roof when the sun shines? Fix it, not put a hole in it.

ZARROLI: Instead, according to Congress's Joint Committee on Taxation, the tax overhaul could add a trillion dollars to the debt over the next decade even after taking extra growth into consideration. That means the government won't have as much money as it needs when the next recession comes around. On ABC "This Week" yesterday, Senate Majority Leader Mitch McConnell dismissed deficit concerns.


MITCH MCCONNELL: So I'm confident this is not only revenue-neutral to the government but actually is very likely to be a revenue producer.

ZARROLI: McConnell says the tax cuts will lead to faster growth, which will mean more revenue for the government, and that should keep the deficit in check. But there's another macroeconomic problem with cutting taxes right now. Former Fed Governor Randy Kroszner says if a tax cut is designed well, it can be a good thing. It can mean companies have more money to spend on new factories and equipment.

RANDY KROSZNER: To the extent that the tax reform focuses on trying to increase the incentives for investment, increase productivity growth in the economy, that's always a plus.

ZARROLI: Kroszner says the tax bill being considered by Congress appears to have some good features in it, but he says there's always a risk cutting taxes will lead to higher inflation. And if it looks like that's happening, the Federal Reserve will step in to cool down the economy.

KROSZNER: If it's seen as something that's just short-term, the Fed is likely to offset that to make sure the economy doesn't overheat, and that is, inflation doesn't get too high.

ZARROLI: The Fed has raised rates twice this year and is expected to do so again this month. Former Fed Vice President Alan Blinder says there's already a consensus on the Fed that the economy is at or near full employment. Increasing demand by cutting taxes could amount to more stimulus than the economy needs.

ALAN BLINDER: I think they would say, we already have pretty much a fully employed economy. A boost to aggregate demand is not exactly what the doctor ordered.

ZARROLI: So this is a strange situation. When the Great Recession began a decade ago, both Congress and the Fed tried to do whatever they could to bolster the economy, but now they're beginning to pull in opposite directions. Last weekend, the head of the New York Federal Reserve, William Dudley, seemed to question the need for a tax cut. He told the Wall Street Journal it's probably not the best time to be trying to stimulate the economy. So while Republicans say they want to make the economy grow faster, Fed policymakers could actually undercut that effort by raising interest rates. Jim Zarroli, NPR News, New York.


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