Middle Class Tax Hikes Put Trump Tax Cuts in Jeopardy – Ep. 291

Congress May Not Deliver Promised Economic Growth

I think part of the renewed weakness in the dollar may be due to the feeling that all the tax cuts are not going to pass.  The Trump/Republican plan outlined some days ago will be difficult to to get through Congress. Even if it does get through Congress it is not going to deliver the economic growth that is being advertised.

Tax Cuts Masquerading as Reform

Go back to the origins to the Republican dialogue about tax reform.  They actually wanted to do reform. All the reform is out the window now. All we have is tax cuts masquerading as reform.  But the initial concept that the Republicans had was to try to move toward a consumption-based tax system. They tried to do that through the back door with the BAT (Border Adjusted Tax), which is the opposite of what the Republicans are now promising, which was tax relief for the middle class. That’s not what they are delivering.

Getting Around Elimination of State & Local Tax Deductions

A lot of people are going to get tax increases.  Part of the problem, though is the elimination of the deductibility of state and local taxes. I mentioned on an earlier podcast that the states can get around this by shifting the tax to a payroll tax that will be fully deductible for the employers.  Any resulting reduction in salary would be offset by the elimination of state and local taxes.  If the states react the way I think they will to the loss of the deduction, the governments will not reap the tax windfall that they expect, causing much bigger deficits.

Big Deficits Ahead

At the end of the day the bill may not pass because Congress may not be willing to sign on to anything that raises taxes.  They want everybody to get at tax cut.  How are you going to do that? How are you going to cut income taxes and not cut spending on anything without having a huge increase in the deficit – which of course is what is going to happen.

Recession Ahead

You can try to assume that some of that increase is not there because of dynamic scoring, you can assume that tax cuts are going to lead to economic growth.  Maybe they will, but I think regardless we’re going to have a recession.  There is no recession in any of the forecasts. Nobody thinks a recession is coming at any point during the next 10 years, whether we cut taxes or not. I think, whether we cut taxes or not we’re going to have a recession, and if there is a recession, you can throw all this dynamic scoring out the window!

Production Equals Stimulus

Even if the recession is not as severe as a result of the tax cuts, the results will still be huge increases  in the budget deficit. They are losing some Republican support and they are going to have to reach across the aisle, and there is no way the Democrats will sign on to any tax cuts for the “rich”.  If they take away tax cuts on corporations, they take away the reduction in the marginal tax rate, then you lose any hope of economic stimulus. That is where the stimulus comes from.  Real economic stimulus comes from more capital investment, more job creation, less consumption. That is what you get when you reduce marginal taxes on people with the highest propensity to save and invest.

Inflation Ahead

The Keynesians have it backwards.  They think stimulus comes from consumption – it doesn’t.  Consumption doesn’t stimulate anything.  Consumption without production just leads to higher prices which is what is going to happen.  We are going to get more inflation.

Peter Schiff is an economist, financial broker/dealer, author, frequent guest on national news, and host of the Peter Schiff Show Podcast.



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