That is absolutely correct.

As the chart below shows there is ZERO evidence that tax cuts lead to stronger sustained rates of economic growth. The chart compares the highest tax rate levels to 5-year average GDP growth. Since Reagan passed tax reform, average economic growth rates have only gone in one direction.

, Weekend Reading: Will Tax Reform Deliver As Expected?

However, the most likely unintended consequence of the proposed tax “cut” bill is that it will likely translate into a “hike” on middle class Americans. Take a look at the proposed tax bracket chart below.

, Weekend Reading: Will Tax Reform Deliver As Expected?

Now, compare that with the actual breakdown of “who pays taxes.”

“The bottom 80% currently pay only about 18% of individual taxes with top 20% paying the rest. Furthermore, the bottom 40% currently have a NEGATIVE tax liability, and with the new tax plan cutting many of the deductions currently available for those in the bottom 40%, it could be the difference between a tax refund and actually paying taxes. “

, Weekend Reading: Will Tax Reform Deliver As Expected?

“Of course, those in the top 20% of income earners are likely already consuming at a level with which they are satisfied. Therefore, a tax cut which delivers a few extra dollars to their bottom line, will likely have a negligible impact on their current levels of consumption.”

Given the newly designed tax brackets compresses individuals into fewer groups, it is quite likely a large chunk of the bottom 80% will likely experience either a hike or an inconsequential change. With the bottom 80% already consuming at max capacity, as discussed yesterday, a tax increase will hit the economy right where it hurts the most – in consumption expenditures. 

 “As the chart below shows, while savings spiked during the financial crisis, the rising cost of living for the bottom 80% has outpaced the median level of ‘disposable income’ for that same group. As a consequence, the inability to ‘save’ has continued.”

, Weekend Reading: Will Tax Reform Deliver As Expected?

But while Congressional members were campaigning yesterday the “tax plan” would give an $1182 tax cut to most Americans, it should not be forgotten that since they failed to “repeal and replace” the Affordable Care Act, any tax cut will only be diverted to offset a substantial rise in health care premiums in 2018.

Regardless, the proposed tax bill is just the first step.

Let the “horse trading” begin.

In the meantime, while we await the actual tax reform bill, here is your weekend reading list.


Trump, Economy & Fed


Markets


Research / Interesting Reads


“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations which do not meet these requirements are speculative.” – Benjamin Graham

Questions, comments, suggestions – please email me.