Capitol Report: Sugar high? Two new reports say economic boost from tax cuts may be fleeting

Enjoy the economic impact from the tax cuts while you can, because it won’t last long, according to two reports released Tuesday.

Morgan Stanley and the International Monetary Fund put out strikingly similar reports, saying the $1.5 trillion Tax Cuts & Jobs Act will basically give the U.S. a sugar hit.

The Morgan Stanley report — titled, “The Downside of Fiscal Stimulus” — is particularly negative. That report argues the benefits of fiscal stimulus are mostly priced in, since the S&P 500 SPX, +1.04% rallied 20% last year and 10-year bond yields TMUBMUSD10Y, +0.03%  rose 45 basis points beginning when tax reform started to look more likely in September.

Key tax-reform provisions incentivize a near-term boost in consumption, Morgan Stanley points out. Immediate expensing begins to phase out at the end of 2022 and expires completely at the end of 2026, the report said, and interest deductibility becomes more limited in 2022 in a way that, per Morgan Stanley’s estimates, will impact 8% of investment-grade and 50% of high-yield companies.

Personal tax cuts expire at the end of 2025, with Republicans insisting they will be extended.

Another concern the investment bank has is that rising deficits make congressional support for fiscal help in the next recession less likely. The report flags a possibility that austerity politics could stage a return, and that debt-rating-agency concerns could draw publicity.

Related: Tax cuts will lead to sea of red ink, CBO forecasts

The International Monetary Fund makes similar points, perhaps lost beneath its decision to upgrade its U.S. growth estimate for the next two years.

Also see: IMF lifts U.S. growth outlook on tax-cut view

The IMF world economic outlook in particular focuses on the impact of temporarily increasing the investment expensing allowance, and, like Morgan Stanley, the IMF comes away with the idea that growth will be brought forward only temporarily.

“The U.S. tax reform will reduce growth momentum starting in 2020, and then more strongly when full investment expensing begins to be phased out in 2023,” the IMF says.

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