Weekend Reading: It’s The Debt, Stupid

On Thursday, Fitch confirmed the same in their dismal report on the reality of what the effect of the “tax cut”

“Such reform would deliver a modest and temporary spur to growth, already reflected in growth forecasts of 2.5% for 2018. However, it will lead to wider fiscal deficits and add significantly to US government debt. As such, Fitch has revised up its medium-term debt forecast. US federal debt was 77% of GDP for this fiscal year. Fitch believes the tax package will be revenue negative, even under generous assumptions about its growth impact. Under a realistic scenario of tax cuts and macro conditions, the federal deficit will reach 4% of GDP by next year, and the US debt/GDP ratio would rise to 120% of GDP by 2027.

 

Tax cuts may lead to a short-lived boost to output, but Fitch believes that they will not pay for themselves or lead to a permanently higher growth rate. The cost of capital is already low and corporate profits are elevated. In addition, the effective tax rate paid by large corporations is well below the existing statutory rate.

 

Fitch expects US economic growth to peak at 2.5% in 2018 before falling back to 2.2% in 2019. The US will enter the next downturn with a general government “structural deficit” (subtracting the impact of the economic cycle) larger than any other ‘AAA’ sovereign, leaving the US more exposed to a downturn than other similarly rated sovereigns. The US is the most indebted ‘AAA’ country and it is running the loosest fiscal stance. Long-term debt dynamics are also more negative than those of peers, with health and social security spending commitments set to rise over the next decade. “

There is nothing “good” in any of the statements above,  and drive to the same conclusions I discussed last Monday.

You can’t solve a debt problem, by issuing more debt. 

While Congressional members continue campaigning that the “tax plan” would give an $1182 tax cut to most Americans, and boost wages by $4000, such has never been the case. A recent study by the Economic Policy Institute suggested the same in a recent study:

“Cutting corporate tax rate cuts would do very little to boost employment generation. In fact, cutting corporate tax rates ranks as the least effective form of fiscal support for employment generation, since corporate tax cuts primarily benefit rich households—who are less likely to increase their consumption than low- or middle-income households when they receive tax cuts.”

This is a point I have made previously. Corporate tax rate cuts will unambiguously redistribute post-tax income regressively. The corporate income tax is a progressive tax, with the top 1% of households accounting for 47% of the corporate income tax.

Don’t be bamboozled by the idea that tax cuts and reforms will lead to sustained economic growth. There is simply NO evidence that such is the case over the long-term.

However, there is plenty of evidence to suggest that further costly reforms and run-away budgets will lead to an increase of the current national debt and the ongoing low-growth economy that has plagued the U.S. since the turn of the century.

In other words….“it’s the debt, stupid.”

In the meantime, here is your weekend reading list.

Trump, Economy & Fed

• Supply Shocks Raise Odds Of Fed Mistakeby Danielle Dimartino-Booth via Bloomberg
• The “Rob Peter To Pay Apple” Actby Matt Labash via TWS
• Cutting Corporate Taxes Is The Best Part Of The Plan by Caroline Baum via MarketWatch
• Deficit Hawks Skeptical Of Assumptionsby Matt Welch via Reason
• Which Companies Spend Most On Lobbyists by Simon Constable via Forbes
• Most Important Things Still In The Tax Bill by Nathan Lewis via Forbes
• Amended GOP Tax Plan Points Released by Tyler Durden via ZeroHedge
• The “Haggling” Will Only Intensify by Joe Ciolli via BI
• Please Stop Calling Me A “Shadow Banker” by Pedro Da Costa via BI
• GOP Has A $74 Billion Hole In Their Tax Bill by Bob Bryan via BI
• Why The Numbers Don’t Add Up For The Tax Bill by Yuval Rosenberg via Fiscal Times
• A Government Of, By & For The Plutocrats by Nomi Prins via The Daily Reckoning
• Proposed Tax Bill Needs To Die by David Leonhardt via NYT
• Tax-Cut Proponents Ignore There’s No Free Lunch by Henry Aaron via Real Clear Markets
• GOP Tax Plan Screws The Middle Class by David Stockman via Daily Reckoning
• How The GOP Can Pay For The Tax Plan by Hugh Hewitt via Washington Post