Source: Euro Pacific Capital, by Peter Schiff
Donald Trump has made good on one of his most audacious campaign promises by submitting what he describes as the biggest tax cut in U.S. History. For once, at least, this does not appear to be Trumpian braggadocio. It really may be the mother of all tax cuts. But if passed, what may this bunker buster do to the economy? While I have rarely met a tax cut I didn’t like, this one just may be more likely to send the economy into a downward spiral than it is to send up to orbit.
As I mentioned in my January commentary, Donald Trump’s big-spending, tax-cutting campaign rhetoric threatened to make him the biggest borrower in presidential history. He comes to office at a particularly vulnerable time for budget dynamics. After contracting by nearly two thirds from 2010 to 2015 (from the mind-bending $1.3 trillion to the merely enormous $438 billion), the Federal deficit started expanding again in 2016, moving up to $587 billion (Govt. Publishing Office, Office of Management & Budget (OMB). Current projections have it going up nearly every year over the next two decades. The Congressional Budget Office expects it to permanently surpass $1 trillion annually by 2021 or 2022. But these ominous forecasts were made well before anyone thought Trump had a snowball’s chance of ever becoming president. Now that he is in the office, those projections will be the floor. The ceiling is anyone’s guess.
The forecasts assume that the taxing and spending laws in place during the Obama Administration won’t change. The steep increase in projected deficits towards the end of this decade and into the next is largely driven by the retirement of the Baby Boom generation, which will lead to simultaneous increases in entitlement spending and decreases in tax revenue. This brick wall has been hiding in plain sight for decades but the can-kickers in Washington have serially failed to do anything to avert the inevitable collision.
(These forecasts also optimistically assume that the economy never again enters recession, inflation never again rears its ugly head, and that our creditors never get concerned enough about our growing debt to demand a premium for the risk of financing it.)
But now that Trump occupies the Oval office, this date with destiny may come much sooner…and she will definitely be ordering the lobster.
Before I go negative, let me give credit to Trump for picking the right taxes to cut. He kills the estate tax, an ugly beast that should have been euthanized years ago. Some may see this simply as a gift to the very rich. But legal wizards have long since devised strategies that offer almost complete protection from the death tax. None of these structures offer any real benefit to the businesses these millionaires typically own, or to the economy in general. Killing the tax will cost the government almost nothing, but it will remove tremendous impediments that have prevented family-run companies from growing over generations. He also kills the Alternative Minimum Tax, a complex parallel system of taxation that few understand but somehow manages to ensnare more and more taxpayers every year.
Most importantly, he brings down the corporate tax rate from the globally non-competitive rate of 35% to the much more manageable 15%. Taxing corporations has always been a bad way to raise revenue. Corporations, after all, don’t pay taxes, which are simply treated as a cost of doing business. The real costs are borne by customers, who must pay higher prices, and employees, who must suffer with lower wages. But high domestic corporate taxes have hamstrung U.S. corporations and greatly contributed to the decline of American manufacturing. A more competitive corporate sector will shower benefits on all manner of consumers and employees.
On the individual tax side, his decisions are much more problematic. Although Trump makes the sensible decision of compressing the seven individual tax brackets into just three (10%, 25%, and 35%), and doubles the standard personal deductions (thereby saving many people from the hassles of itemization), the headline-grabbing component of the proposals has to do with the lowering of the “pass-through” tax rate to the same 15% level that applies to corporations. This means that wealthy business owners, highly paid freelancers, and partners at law firms, medical groups, and management consultancies, will qualify for the 15% rate. This will be a huge windfall to some of the richest people in the country, who typically pay the highest marginal tax rate (currently 39%). And since the top one percent account for nearly 50% of tax revenue, this one provision promises to cost Uncle Sam plenty and to dramatically shake up the corporate landscape.
Read More Here: Damn the Deficits, Huge Tax Cuts Ahead! | Euro Pacific Capital