On Wednesday, the President announced his plan to cut taxes for Americans, return jobs to America and return the country to economic prosperity.
It’s a tall order to fill, and the proposed tax reform is a “Christmas Wish List” that will have to checked twice to determine which parts are “naughty” and “nice.”
“The belief that tax cuts will eventually become revenue neutral due to expanded economic growth is a fallacy. As the CRFB noted:
‘Given today’s record-high levels of national debt, the country cannot afford a deficit-financed tax cut. Tax reform that adds to the debt is likely to slow, rather than improve, long-term economic growth.’
The problem with the claims that tax cuts reduce the deficit is that there is NO evidence to support the claim. The increases in deficit spending to supplant weaker economic growth has been apparent with larger deficits leading to further weakness in economic growth. In fact, ever since Reagan first lowered taxes in the ’80’s both GDP growth and the deficit have only headed in one direction – lower.’
That little green bump in the deficit was when President Clinton “borrowed” $2 trillion from Social Security to balance the budget, and since there were no cuts to spending, led a surplus that lasted about 20-minutes.
The problem is that the tax plan may not provide the benefits as hoped. While President Trump suggests the plan will return “trillions” of dollars locked up overseas to create jobs, the reality, according to Goldman Sachs, is likely closer to $250 billion that will primarily go to share buybacks, dividends, and executive compensation.
Of course, such actions do not boost economic growth but are a boon to Wall Street and the 10% of the economy that invest in the market.
But here is the key point with respect to tax cuts. History is replete with evidence that shows tax cuts DO NOT lead to a rapid growth in the economy. As shown below, the slope of economic growth has been trending lower since the “Reagan tax cuts” were implemented.
Lastly, tax cuts have relatively low economic multipliers particularly when they primarily only benefit those at the top of the income spectrum. With the average household heavily indebted, credit is being used to sustain the standard of living, there is likely to be little transfer of “tax savings” back into the economy.
“It is a simple function of math. But the following chart shows why this has likely come to the inevitable conclusion, and why tax cuts and reforms are unlikely to spur higher rates of economic growth.”
As is always the case…“it’s the debt, stupid.”
However, here are plenty of discussions both for and against the tax plan so you can decide for yourself.
Trump Tax Cut Plan
- Separating Fact From Fiction by Caroline Baum via MarketWatch
- Surveys Of Trump Tax Cuts Are Misleading by IBD
- Tax Reform – Simpler Code, Lower Taxes, Economic Growth by Tony Mecia via TWS
- Ignore Naysayers, Tax Cuts Help Everyone by Ed Feulner via Washington Times
- Do Republicans Care About The Deficit? by Jared Bernstein via NYT
- It’s Crucial That Republicans Pass Tax Cuts by Thomas Del Beccaro via Forbes
- CEO’s Fear Tax Reform Won’t Measure Up by Shawn Tully via Fortune
- I Can’t Figure Out The Tax Code by Bill O’Neill via IBD
- All The Sweet, None Of The Sour by Joe Ciolli via BI
- Tax Reform, The Time Has Come by Wayne Brough via The American Spectator
- Most Americans Don’t Need A Tax Cut by Rex Nutting via MarketWatch
- Tax Reform Won’t Fix Budget Mess by Shawn Tully via Fortune
- Fed Is Anticipating Tax Reform? by Brian Domitrovic via Forbes
- UBS: Tax Reform Won’t Happen by Tyler Durden via Zerohedge
- GOP Buys Into The “Tax Fairness Lie” by IBD
- Will Repatriation Really Work? by Eduardo Porter via NY Times
- “Wolf Of Wall Street” – Bitcoin Not Viable by Shawn Langlois via MarketWatch
- Finance Chiefs Growing Pessimistic About The Future by Ciara Linnane via MarketWatch
- The Real Threat To The Equity Bull Market by Nicholas Colas via Bloomberg
- The Coming Bear Market? by Robert Shiller via Project Syndicate
- Ramping Up Policy Normalization by Stephen Roach via Project Syndicate
- Little Things Mean A Lot by Cliff Asness via AQR Capital Management
- Will The Fed Hike Us Into A Recession by James Picerno via Capital Spectator
- Tech Weakness Can’t Kill Bull Market by Michael Kahn via Barron’s
- Chinks In Bull Market’s Armor by Bryce Coward via Knowledge Leaders
- IPO Market Needs Revamping by James Mackintosh via Streetwise
- Most Stocks Aren’t Good Investments by Jeff Sommer via NYT
- Economic Growth Frustrating Bulls & Bears by Joe Calhoun via Alhambra Partners
- Janet In Wonderland by Ed Yardeni via Yardeni Research
- Time To Sell Fangs by Doug Kass via RIA
- Yields Jump As Bond Traders Reposition For Tax Cuts by Mark DeCambre via MarketWatch
Research / Interesting Reads
- White House As Trump’s New Casino by Nomi Prins via The Daily Reckoning
- Your Investment Risk Isn’t What You Think by WSJ
- Socialism Has Yet To Work by Richard Rahn via Washington Times
- FED: We’ve Been Here Before by Scott Sumner via Econolog
- What Do The Best Investors Do That You Don’t by Behavioral Value Investor
- The Death Of Active Management Is Greatly Exaggerated by Jeff Troutner via Index Funds
- Fed Wrong That Hurricanes Are Economically Good by Simon Constable via PJ Media
- Mauldin: The Pension Crisis Is Coming by John Mauldin via Zerohedge
- Bridgewater: Fed Is Making A Huge Mistake by Rachael Levy via BI
- Investing Is Never Passive by Matthew Bartolini via SPDR blog
- More Spending Does NOT Drive Employment by Bylund via The Mises Institute
- Single Most Overvalued Point In History by John Hussman via Hussman Funds
- Households Are Loaded With Stocks by Dana Lyons via Tumblr
- All You Need To Know About The Fed In Two Charts by Jesse Felder via The Felder Report
“A bull market is like sex. It feels best just before it ends.” – Warren Buffett
Questions, comments, suggestions – please email me.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube