Republican’s Tax Reform = U.S. Bankruptcy?

Popular Economics Weekly

We know most of the sordid details, by now. The Repubs’ about-to-be-approved tax bill will drive the U.S. into a defacto bankruptcy. It contains very little for the middle and lower income tax brackets that do the most to boost economic growth with their spending, and lots for the 1 percent that spend the least, including doubling the inheritance tax exemption and lowering both personal and corporate taxes.

This will not generate enough tax revenue to pay for the additional debt, so foreign governments and individuals will become more reluctant to invest in U.S. debt, as the deficit continues to grow and interest rates rise, crowding out other, important investments.

It also cuts Medicare and Medicaid benefits by approximately $1.5 trillion to pay for this huge tax cut. But that isn’t really paying for it, since this takes income away from those supported by our social programs.

How does that make sense, when financial markets are already flooded with cash, and all kinds of bubbles are popping up? Bond valuations are at all-time highs (meaning interest rates are still at historical lows), corporations are already making record profits, and stocks’ price-to earning levels resemble those of the 1929 market crash that led to the Great Depression.

Everything is already overvalued, in other words, yet the Republican congress wants to give even more money to the wealthiest, who plan to use it to boost their paychecks, and that of their stockholders.

There will be little money left to boost wages and salaries, according to CEOs that have been surveyed. And why should they boost their workers’ incomes? Most new jobs are low paying, warehouse jobs for the likes of Amazon.

 

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Graph: Econoday

It fantastical thinking to believe otherwise. A lack of skilled workers is very likely a key factor why high levels of employment have not led to meaningful wage improvement, says Econoday. Inflation is not rising because real average hourly earnings are barely rising, which is why discounting is still prevalent.

So congress is really reducing tax revenues that are needed to pay for all that debt. This is what GW Bush tried to do in 2001-2 with his tax cuts, which led to the record budget deficit, bursting of the original housing bubble, and Great Recession.

And it can happen again. It is suicidal economics, in that the U.S. won’t declare bankruptcy, since it can print all the money in our own currency to pay for the inflated debt levels. But it will saddle future generations with an impossible debt load, and prevent much needed public and private investment that would increase productivity and boost growth.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Keynesian economics, Uncategorized, Weekly Financial News and tagged , , , . Bookmark the permalink.

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