Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
Students, It’s Time to Prepare Your Finances for the Years Ahead - 25th Jul 17
Stock Market and Gold Stocks Trend Forecast Update - 25th Jul 17
Saving Illinois: Getting More Bang for Its Bucks - 24th Jul 17
3 Stocks Sectors That Will Win in The Fed’s Great Balance-Sheet Unwind - 24th Jul 17
Activist Investors Are Taking Over Wall Street, Procter and Gamble Might Never Remain the Same - 24th Jul 17
Stock Market Still on Track - 24th Jul 17
Last Chance For US Dollar To Rally - 24th Jul 17
UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - 22nd Jul 17
Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts - 22nd Jul 17
Warning: The Fed Is Preparing to Crash the Financial System Again - 21st Jul 17
Gold / Silver Shorts Extreme - 21st Jul 17
GBP/USD Bearish Factors - 21st Jul 17
Gold Hedges Against Currency Devaluation and Cost Of Fuel, Food, Beer and Housing - 21st Jul 17
Is It Worth Investing in Palladium? - 21st Jul 17
UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - 21st Jul 17
The Fed May Show Trump No Love - 20th Jul 17
The 3 Best Asset Classes To Brace Your Portfolio For The Next Financial Crisis - 20th Jul 17
Gold Stocks and Bonds - Preparing for THE Bottom - 20th Jul 17
Millennials Can Punt On Bitcoin, Own Safe Haven Gold For Long Term - 20th Jul 17
Trump Has Found A Loophole To Rewrite Trade Agreements Without Anyone’s Permission - 20th Jul 17
Basic Materials and Commodities Analysis and Trend Forecasts - 20th Jul 17
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17

Market Oracle FREE Newsletter

Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts

Trump Deficit Spending Will Stop Tax Reform

Politics / Taxes May 13, 2017 - 04:29 AM GMT

By: John_Mauldin

Politics

BY PATRICK WATSON : Many people still assume a big tax cut is coming. I think we won’t get any tax cut at all—but if we do, it will cause another problem.

In other words, we’re going to lose either way.


Here’s Why The Trump Plan Won’t Work

The tax reform wish list the White House unveiled recently isn’t exactly a “plan.” It’s more like an outline, minus the details.

Still, the goals are clear enough: Trump would reduce almost everyone’s federal tax burden and make the system somewhat less complicated.

Objections fall into two categories:

  1. The biggest tax reductions would go to the wealthy.

There’s truth to this, but it’s hard to make the math work differently. The top 20% of Americans pay 84% of all income taxes. You can’t cut someone’s taxes unless they pay taxes.

Of course, the 40% of Americans who are “income tax-negative” still face payroll, property, sales, and assorted other taxes. Maybe it would make sense to cut some of those, but that’s largely a state and local matter.

  1. The tax cut would blow up the deficit.

This one has more merit. No one has figured out how to cut income taxes in a way that is both politically balanced enough to get through Congress and neutral to government revenue.

That’s necessary because we obviously can’t cut spending. The president’s budget proposal shifts money from other departments to defense but doesn’t reduce the total.

As a result, the Trump administration didn’t even try to keep the plan revenue-neutral with spending cuts. They instead claim it will spur economic growth, which will create more future tax revenue.

Is that true?

Probably—but not to the extent they hope. Lower tax rates should spur a little more business investment and consumer spending. Few economists think it will be enough to fully offset the lost revenue.

(Brief tangent: I really don’t like describing tax cuts as “lost revenue” for the government. The government can’t lose what it never owned. Your income is yours first. You simply keep whatever amount Washington allows. I use the phrase only as convenient shorthand, reluctantly.)

The Deficit Will Explode

But deficit spending isn’t really the problem. Our disease is excessive spending. Deficits and too-high taxes are merely its symptoms.

All government functions cost money to deliver; that’s why we have taxes. The real issue is we have let government grow to a size where it now needs $7.03 trillion to get by (that’s how much federal, state, and local governments combined will make in fiscal year 2017).

Looking at the big picture, it doesn’t matter if the government funds itself with a). taxes now or b). borrowing now and taxes later. Both funding methods divert equal sums from private sector uses that could be more productive.

Longer term, though, it makes a huge difference.

Suppose I’m wrong. Suppose a series of miracles will give Trump everything on his wish list. Then what?

Unless another series of miracles cut government spending to the bone, we will get huge budget deficits.

The Treasury will issue more bonds to finance the deficit, crowding out private borrowing and forcing interest rates higher.

Higher rates will send the dollar up against other currencies, hurting US exports and corporate earnings.

At some point, long-term bond yields will look more attractive than stock dividends. Then stock prices will adjust lower… maybe a lot lower.

And while this unfolds, the Federal Reserve may be raising short-term rates and winding down its bond portfolio.

Not to mention that we’re overdue for a recession and first-quarter GDP looked dismal.

Be careful what you wish for.

FREE PREMIUM REPORTS: 3 Stocks You Need (and 3 You Don’t) in 2017

Discover the best and worst stocks in 2017. This bundled series of exclusive reports reveals three companies set to soar and three you should steer clear of (one of them will surprise you). Download Three Deadly Dow Stocks and Three Top Picks for Income & Growth for free now.

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife