Greenspan: Tax reform will hit the US economy

Federal Reserve Chariman Alan Greenspan takes his seat before the start of a Senate Banking Committee hearing on Wednesday, Feb. 16, 2005 in Washington. Greenspan urged a go-slow approach on personal Social Security accounts, saying that while he embraces the idea central to President Bush's proposed overhaul, he is concerned about stability in financial markets. (AP Photo/Evan Vucci)
Ex-head of the Federal Reserve Alan Greenspan is sure that the tax reform promoted by the Republican Party will not contribute to a significant growth of the US economy.

At the same time, he noted that the risks from the tax reform are underestimated. Greenspan said that there is a high risk of a sharp and uncontrolled rise in inflation.

The former head of the Fed is sure that the plan of the Republican Party, approved by President Donald Trump, should be focused on reducing the budget deficit and fighting inflation.

According to the reform plan, the corporate tax rate will be reduced from 35% to 20%, the rates for individuals will also be significantly reduced. The analysis of the plan shows that it can contribute to the growth of the budget deficit by $ 1 trillion in the next 10 years, although the White House argues that the tax cuts will be compensated by GDP growth.

“This is a terrible financial situation that we’ve been in. The White House administration is trying to cut taxes and cut costs, but it’s doing it in the wrong order.” Now we need to focus on reducing debt, “Greenspan said in an interview with CNBC.

The Senate approved the reform plan, which was jointly developed by the Republican Party and the White House. If everything goes according to schedule, the bill on tax reform will be on Trump’s table before Christmas.

Nevertheless, critics argue that, in addition to inflating the hole in the budget, the main benefits of reform will be the wealthiest Americans. Greenspan said he was worried about the imbalances that this plan could create.

“We are at the stage where, if nothing changes, we will move from stagnation to stagflation, with a significant increase in inflation and a very significant imbalance in the economy,” the former Fed chairman said.

According to officials of the White House, the tax plan combined with deregulation and higher spending on infrastructure will create an economic growth of at least 3%. GDP in the II and III quarters was 3.1% and 3.3%, respectively.

Greenspan predicted that GDP growth in the IV quarter will be “much slower” than in the previous two quarters.

“Reducing taxes, remember, with the same increase in the deficit: When you increase the deficit and increase the demand for funds, you crowd out investments, and investments are the key factor determining output per hour, that is, productivity,” Greenspan said.

Greenspan headed the Federal Reserve from 1987 to 2006, leaving the post shortly before the financial crisis.

Among other things, he is known for his prediction in 1996 about the “irrational abundance” in the stock market during the dotcom boom. In 2017, he warned that the “bubble” in the bond market should have appeared because of the preservation of “abnormally low” interest rates.