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Weekend Reading: Tax Cuts Saved The Economy?

Written by Lance Roberts | Oct 19, 2018
, Weekend Reading: Tax Cuts Saved The Economy?PRINTER FRIENDLY VERSION
, Weekend Reading: Tax Cuts Saved The Economy?

IBD recently penned an article touting the success of the recent tax cuts from the Trump administration.

“The Treasury Department reported this week that individual income tax collections for FY 2018 totaled $1.7 trillion. That’s up $14 billion from fiscal 2017, and an all-time high. And that’s despite the fact that individual income tax rates got a significant cut this year as part of President Donald Trump’s tax reform plan.”

Hold on a second.

A $14 billion increase on $1.68 Trillion in receipts is a very paltry 0.8% increase. This is the 8th LOWEST rate of increase in the history of data and is more representative of population growth rather than the success of tax cuts bringing in more revenue.

, Weekend Reading: Tax Cuts Saved The Economy?

In fact, when looking at Federal Receipts on an annualized basis, growth in receipts as of the end of Q2 has fallen by more than 4% annually. Importantly, throughout history, negative growth rates in Federal receipts have been associated with recessionary periods in the economy rather than expansions.

, Weekend Reading: Tax Cuts Saved The Economy?

But IBD in their effort to support the Trump tax cuts continues:

“Critics of the Trump tax cuts said they would blow a hole in the deficit. Yet individual income taxes climbed 6% in the just-ended fiscal year 2018, as the economy grew faster and created more jobs than expected.”

Well first, as we have shown previously, the tax cuts DID INDEED blow a hole in the deficit. Currently, the deficit is rapidly approaching $1 Trillion and will exceed that level in 2019.

, Weekend Reading: Tax Cuts Saved The Economy?

To IBD’s point, the economy has grown faster than expected and jobs have increased (but not more than expected.)

“Yes, the economy was booming in fiscal 2018. But it probably wouldn’t have been booming without the tax cuts.

Actually, no.

It wasn’t Trump’s tax cuts that led to this growth but, as we discussed recently with Danielle Dimartino-Booth, it came from a “sugar-high” created by 3-massive Hurricanes in 2017 which have required billions in monetary stimulus, created jobs in manufacturing and construction, and led to an economic lift. We saw the same following the Hurricanes in 2012 as well.

, Weekend Reading: Tax Cuts Saved The Economy?

However, these “sugar highs” are temporary in nature. Fortunately, for the economic bulls, a bit of reprieve has come from Hurricanes Florence and Michael which will provide some continued boost to economic growth into Q2 of 2019.

The problem is the massive surge in unbridled deficit spending which provides a temporary illusion of economic growth but leads to long-term economic suppression.

Eventually, the debt will come due.

So, while IBD is taking a victory lap touting the success of the Trump agenda, the reality is that the pro-growth policies were launched to late within an economic cycle. This will ultimately ensure the next recessionary drag will likely be larger and last longer than most expect as both fiscal and monetary policy tools were spent during the boom, rather than saved for an eventual “rainy day.”

Just something to think about as you catch up on your weekend reading list.

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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
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