Trump’s Tax Cuts: The Good, The Bad, and the Inflationary

Tuesday, December 26, 2017
By Paul Martin

By Stefan Gleason
GoldSeek.com
Tuesday, 26 December 2017

At last, tax reform is happening! Last week, President Donald Trump celebrated the passage of the most important legislation so far of his presidency.

The final bill falls far short of the “file on a postcard” promise of Trump’s campaign. It even falls short of the bill trotted out by Congressional Republicans just a few weeks ago. It is, nevertheless, the most significant tax overhaul in more than a decade.

Corporations and most individual taxpayers will see lower overall rates. That’s the good news.

Unfortunately, there is also some not so good news investors need to be aware of.

Because no spending cuts will be attached to “pay” for the tax rate reductions, the legislation will grow the budget deficit by an estimated $1 trillion to $1.5 trillion over the next decade. The actual number could end up being smaller…or bigger, depending on how the economy performs. But more red ink will spill.

The GOP tax bill is effectively a debt-financed stimulus package. It will boost economic growth in the near term while saddling taxpayers with larger long-term debt burdens.

“Even if we get the kind of growth we hope to get,” admitted GOP House Speaker Paul Ryan, “You cannot grow your way out of the entitlement problem we have coming.”

He’s referring to tens of trillions of dollars in unfunded Social Security and Medicare obligations. They are all but politically impossible to tackle, except through the voodoo of new debt and currency creation that will keep benefits flowing with devalued dollars (i.e., inflation).

Inflation Unchained?

The expected increase in the budget deficit and boost to private sector economic growth from tax changes have the potential to combine for an inflationary outcome. More growth means more demand for manufactured products and the raw materials that go into them. Higher deficits mean more newly created dollars will get pumped through the financial system and eventually make their way into the real economy.

Higher rates of inflation work against investors (and work for the government) in numerous ways.

For one, the government gets to tax any nominal gains realized on assets artificially boosted by inflation. Even when assets appreciate less than the inflation rate (and post losses in real terms), the government can still tax the artificial gains.

Another “inflation tax” hazard for investors is winding up in higher tax brackets due to nominal increases in income. Wages and/or investment income that rise merely to keep pace with inflation can push taxpayers into higher rates of taxation (the new tax bill modestly lowers rates but keeps the same bracket structure).

The problem of “bracket creep” is supposed to be offset by annual increases in the bracket cut-off levels based on the Consumer Price Index. But a provision buried in the GOP tax bill changes the inflation gauge to “chained CPI.”

The difference between chained and unchained CPI is small in any given year. But according to the Joint Committee on Taxation, this obscure little change will cost taxpayers (and benefit the government) over $30 billion through 2026. That’s because chained CPI usually comes in lower than regular CPI.

The Rest…HERE

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