Washington: President Donald Trump’s economic team says it won’t be satisfied until Americans workers earn more — and aggressive tax cuts are essential for those fatter paychecks.

But with unemployment at its lowest rate since before the financial crisis, the world’s biggest economy may already be nearing top speed. That means a big fiscal boost resulting from tax changes could stoke inflation to levels that would prompt the Federal Reserve to raise borrowing rates faster than anticipated. If that happens, Trump’s ambitious growth goals could be jeopardised.

The unemployment rate now sits at 4.4 per cent after US employers hired more workers than expected in April. But wages were a soft spot, climbing just 2.5 per cent from a year earlier. In an interview Friday with Bloomberg TV after the figures were released, senior White House adviser Gary Cohn said the administration wants to see wages rise faster.

“We’re doing OK, but you see from the data, we’re doing OK with jobs that don’t pay that much,” said Cohn, director of the National Economic Council. “We need to bring back the manufacturing jobs that pay a lot. We need to bring back the service jobs that pay a lot.”

Cohn along with other administration officials say their plans to revise the tax system, cut regulatory red tape and negotiate better trade deals will convince more companies to stay or return to the US, spur more higher paying jobs and ultimately increase consumer spending. They say that will help to lift economic growth to 3 per cent within two years, a rate not seen on an annual basis in more than a decade.

“So we’re doing a very big tax cut. We need it,” Trump said during an interview with Bloomberg News on May 1. The US economy’s “not growing, it’s not growing at all. We need something — we need a stimulus.”

Stimulating demand

The question is whether the US economy is even capable of growing at that level without overheating, economists say. And the scant details included in the Trump administration’s tax plan released last week are creating uncertainty about how much growth the cuts can actually generate.

One way to boost growth through tax reform is by stimulating demand, said Douglas Elmendorf, a former official at the Fed and the Congressional Budget Office, who is now dean of Harvard University’s John F. Kennedy School of Government. But demand isn’t nearly as weak as it was in 2009, when the US government rolled out a $787-billion (Dh2.8 trillion) stimulus package, he said.

The economy was also arguably in deeper trouble in 1986, when Ronald Reagan pulled off what some called the biggest overhaul of the US tax system in history. The economy was coming out of a recession only a few years before, and while the jobless rate was coming down from its peak, it was still about 7 per cent.

The situation isn’t nearly as dire now. “Any increase in demand spurred by tax changes will be very much offset by tighter monetary policy,” said Elmendorf.

“The other way to spur economic activity and boost jobs is by creating structural economic changes that boost the potential output of the economy, for example by increasing capital investment,” he said. Whether the administration can do that depends on hundreds of specific features of the tax plan that they have not spelt out.

Individual cuts

Cohn and Treasury Secretary Steven Mnuchin released an outline of Trump’s tax plan on April 26 that borrowed heavily from the president’s campaign themes. The plan would cut tax rates for all businesses to 15 per cent. The current corporate tax rate is 35 per cent, though many companies trim their bills via various deductions and credits.

For individuals, Trump wants to consolidate the existing seven tax rates to three, with a top rate of 35 per cent, down from the current 39.6 per cent.

Former US. Federal Reserve Chairman Ben Bernanke said earlier this week in an interview on Bloomberg TV that the Trump administration’s plans to cut personal tax rates appear ill-timed and may do little to spur a higher rate of economic growth.

“Why not think about improving the efficiency of the corporate tax code, or doing infrastructure that I think would have more direct effects on supply and potential output than a personal tax cut?” Bernanke said.