Economics 101: The Dismal Science & the Trump Tax Cuts

Everything You NEVER Wanted to Know About Economics

(but were afraid to ask)

Economics 2GNP, GDP, National Income, the trade deficit, inflation rate, strength of the dollar, unemployment, growth, productivity, recession.  Economics is a buzz-kill.  That’s why 18th-century economist Thomas Malthus coined it “the dismal science,” the analysis of conditions connected with unemployment, shortages and plain old human misery.

But economics is fundamental to each human’s wellbeing.  Will I have a job?  Will my income keep up with inflation?  Can I afford a new mortgage, and will the equity in my house grow enough to help me retire successfully?  That’s why politicians sprinkle their rhetoric with economic promises, and sometimes sleight of hand.

Donald Trump ran and won on a straightforward economic platform: more high-paying jobs.  Basically, everything else (except perhaps national security) supports that; immigration control, infrastructure reinvestment, smarter trade deals.  And so far the news is pretty good.

Economic bellwethers have looked strong during the opening months of the Trump administration.  Overall economic growth exceeds 3%, the best in over two years.  Unemployment is about 4 ½% and has been declining throughout the year (many economists consider 5% to be “full employment”).  Inflation is tame at less than 2% (keeping in mind it was 11-13% in the Carter era) and holding, resulting in low interest rates that make home mortgages and financing new business investments affordable.  And the index of leading economic indicators—used by economists and the government to forecast future economic performance—is positive and improving.

Now we’re not out of the woods yet.  We still need more “good” jobs, paying enough to provide workers the standard of living that has become customary in America.  And there are still too many people under-employed—working in low-paying jobs beneath their level of skill and training—or simply discouraged and out of the workforce.

With this as a backdrop, the administration has announced it’s tax reform initiative, to be taken up quickly by Congress.  There are two main features: simplification and rate reductions.

Just about everyone agrees with the need for simplification.  The average person who itemizes is incapable (like me) of navigating the American tax code.  Here is an actual example of a paragraph from an IRS tax publication:

For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 501(c)(3).

It gets worse from there.

The second feature is an across the board reduction of taxes and tax rates for businesses and individuals.  It is designed to put more money back into the hands of individuals and businesses, both in the interest of fairness and under the well-founded assumption it will be largely re-spent, thereby spurring the creation of new and better jobs.

The risk is that, at least initially, tax revenues will go down, increasing the deficit and potentially leading to other serious problems down the road.  The hope and expectations are that the cuts will stimulate enough new jobs and income to replace those revenues, not through higher tax rates, but simply through greater incomes for everyone.  It’s definitely a risky move by the president.

The Democrats, as only they can, are trying to paint an ugly face on what should be seen as good for everyone.  They are characterizing the president’s plan as a cut for the wealthy (it isn’t), pro-business and anti-middle class (it isn’t).  They are simply livid that the Republicans are doing something to help average Americans.  We shouldn’t believe them.

Will Trump’s strategy work?  It’s clearly a risk that could lead to higher inflation, interesteconomics 5 rates and the resumption of the boom-bust-boom cycle that has plagued the American economy in the past.  For my money, it’s worth the risk and, like Presidents Reagan’s and Kennedy’s famous tax cuts, could launch us on a better path to ongoing prosperity.  Let’s give it a try.

 

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