Some Doubt about the Economic Benefits of GOP Tax Reform

There’s a lot of optimism out there that passage of the Trump tax plan will juice the economy. Many analysts say tax cut optimism is one of the factors that continue to push stocks up, and that has created headwinds for gold and silver. But as we’ve pointed out, there are reasons to question this mainstream narrative.

Now some in the mainstream are even starting to question the mainstream narrative.

There are two major problems with putting hope in GOP tax reform.

In the first place, despite some appearance of progress, it remains questionable whether Congress can pull it together and actually get anything done. Multiple failures to repeal, or even significantly reform, Obamacare didn’t create a lot of confidence in the Republican Congress. There are a number of potential sticking points, including a proposal to eliminate the deductibility of state taxes.

Second, as Peter Schiff pointed out, the plan as presented won’t likely create the economic growth it promises. Why not? Because it’s going to balloon the deficit and that is historically bad for economic growth.

The problem is the Republicans are talking tax cuts without any corresponding shrinkage in the size and scope of the US government. The tax plan will reduce revenue, but spending will continue unabated.

A recent article by Bloomberg picked up on this theme. It reported that during the Silver Industrial Conference, head of global commodity strategy at TD Securities in Toronto Bart Melek said the deterioration in the nation’s fiscal standing is a recipe for higher silver and gold prices. He pointed out that from 1984 through 2012, gold rose as the federal debt climbed relative to the gross domestic product.

This isn’t mere speculation, nor a case of correlation with no real link to causation.  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.

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 as Peter has pointed out, 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.”

Melek also likes gold in the short-term, saying he expects the yellow metal to advance by as much as 7% in the next year. He pointed to continued uncertainties from “US political drama and geopolitical tensions with North Korea.”

The Trump tax 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.

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