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Can a Republican Tax Plan Really Deliver?

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After some gains last week, the dollar has shown weakness in recent days. In his most recent podcast, Peter Schiff said he thinks part of the dollar weakness is because the reality is starting to set in when it comes to tax cuts.

In the first place, it remains uncertain whether or not Congress can even get anything done. Obamacare repeal 3.0 went down in flames last month, and Republicans have shown few signs of being able to come together to pass significant legislation such as tax reform.

But as Peter pointed out, there is a more fundamental problem with the Trump tax cut proposal.

But of course, even if it does get through Congress, and even if it’s enacted, it is not going deliver the economic growth that is being advertised.”

Why not?

Because at its core, the plan isn’t true tax reform.

All the reform is out the window now. All we have is tax cuts masquerading as reform.”

Reform means fundamentally changing the tax system. Originally, tax reform involved a consumption element. You might remember the border adjustment tax (BAT). Other ideas were a national sales tax, or a European-style value-added tax (VAT). Theoretically, taxing consumption would have paved the way for lower taxes on businesses, production, and income.

What the government was getting based on the consumption tax they could give up based on the production tax, or income tax, and that was going to be a more efficient tax system. Because there is an economic truism that you get more of what you subsidize and less of what you tax. Well, if you tax production and work, the more you tax it the less of it you’re going to get. You don’t want to get less production and work if you want economic growth.”

On the other hand, shifting taxes toward consumption would disincentivize buying stuff and encourage saving and investment.

The growth aspects are gone if we don’t have that switch – if we don’t move from taxing income to taxing consumption.”

The other problem with the Trump plan is that it is going to blow up the deficit. As it stands now, even a modest normalization of interest rates would crush the US budget under interest payments. Tax cuts without any accompanying spending cuts will simply make debt issue worse. Tax cuts are great, but ultimately we need to shrink government itself.

Nobody wants to cut government spending. It’s amazing that you have these politicians that want to give a tax cut to everyone but don’t want to give a spending reduction to anyone. They don’t want to take away anybody’s benefits. They don’t want to tell one person who’s getting a government check that they’re not going to get that check. Or they don’t want to tell one person who’s getting a government check that they’re going to get a check, but it’s going to be for a smaller amount. Well, if you’re not going to cut anyone’s benefits, how are you going to cut everyone’s taxes? It’s impossible unless you’re going to make the deficit much bigger.”

And that brings us back to economic growth. That’s the ultimate goal of tax cuts. But as we’ve reported, there is evidence that high debt levels retard economic growth. Studies show GDP growth decreases by an average of about 30% when government debt exceeds 90% of an economy. The US debt already stands at 105% of total GDP.

Peter pointed out another issue with the Trump plan. It features tax cuts for the rich and the poor. But if they are going to formulate a plan that cuts taxes and doesn’t spike the deficit – something the GOP says it wants to do – the burden will have to fall somewhere.

If you’re going to give tax cuts to the rich and the poor, and you’re not going to have a massive deficit, then you’ve got to give tax hikes to the middle class, which is the opposite of what the Republicans are promising, which is tax relief for the middle class. That’s not what they’re delivering.”

This complicates the political math. Senators and Representatives will have a hard time signing on to a plan that raises taxes on any of their constituents.

They don’t want anybody having higher taxes. They want everybody to get a tax cut. Well, how are you going to do that? How are you going to cut everybody’s income taxes and not cut spending on anything without having a huge increase in the deficit? Which of course is what’s going to happen.”

The Trump plan certainly has some elements to like. And it may improve things for a lot of people. You can argue any tax cut is better than no tax cut. But looking at the big picture, it seems unlikely the Republican plan is going to fundamentally help the economy grow. It may, in fact, make things much worse over the long haul. That is if they can even get something passed.

A lot of people are put a lot of faith in a Republican tax overhaul. The real question is can the GOP deliver?

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