Deficits Could Undercut Benefit of Tax Cuts

During a recent interview with Investing News Network, Peter Schiff reiterated something he’s been saying for the last several months. The stock market is still a big, fat, ugly bubble, and misplaced optimism continues to blow it up.

[Pres Trump has] accomplished blowing more air into a stock market bubble that already existed before he was elected, as he rightly identified the market as a bubble as a candidate. But you know, his policies have not altered that. In fact, he’s now championing the stock market. He’s the biggest booster. He’s actually claiming credit for the market rising. And I do believe that part of the fuel that has caused the bubble to get bigger is the enthusiasm that Trump will reduce taxes and that these taxes will mean more corporate earnings – certainly after-tax earnings because they cut the taxes – a more robust economy, more growth. And so there’s a lot of optimism. But I think the optimism is misplaced because I believe the added deficits that will result from the tax cuts and the increased government spending will do more harm to the economy than whatever benefit we get from paying lower taxes.”

Some mainstream analysts agree with Peter, warning that the Republican tax cut proposal will balloon the deficit, minimizing its positive economic impact.

According to a Reuters report, Fitch Ratings predicted some type of tax bill will clear both chambers of Congress, but said it will not offer long-term benefits.

Such reform would deliver a modest and temporary spur to growth. … However, it will lead to wider fiscal deficits and add significantly to US government debt.”

Congress’ Joint Committee on Taxation (JCT) estimated the House bill would add nearly $1.5 trillion to the national debt over the next decade. Some analysts say this could push the debt to GDP ratio up to 120%.

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.

There are also increasing questions about whether the GOP can actually pull together and get anything done. Reports came out Tuesday indicating the Senate may put off implementation of the corporate tax cut for one year to comply with Senate rules. News of possible problems moving the plan through Congress pushed the dollar lower, an indication of just how much faith the markets are putting in these Trump tax cuts.

MUFG’s European head of global markets research in London, Derek Halpenny, told Reuters he was skeptical about the future of tax reform.

The initial phases of discussions within the House have brought up a lot of divisions and problems, so the House version itself is going to change before we’ve even got wind of what the Senate version is going to be. If the story is true that they’re considering a delay of one year to the corporate tax cut, those big differences will need to be sorted, so we continue to be dubious on that proceeding.”

Peter emphasized that Americans need to temper their optimism. Even if the GOP tax plan does pass, it could ultimately make things worse. He said the real problem is bigger government.

And paying for bigger government with deficits means more money printing, more quantitative easing. That’s going to be negative for the dollar. It’s going to be harmful to the underlying economy. I mean, it’s actually going to make the situation for most Trump voters worse. Maybe people in the stock market will get richer, but that’s not how Trump got elected. He didn’t get elected promising to make people that owned stocks richer. He promised to bring prosperity to the masses, to make the lives of the middle class better, to have better jobs, better-paying jobs. And nothing that he is doing is going to bring that about.”

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