Thursday 27th April 2017
The big tax plan unveiling ? The lack of market reaction is pretty revealing ......
ref :- "Trump's tax cut plan only pays for itself with growth in Fairyland" , CNBC
No one could accuse President Trump or other members of his administration of overdoing the modesty when it comes to describing their plans. Of course you'd expect them to adopt a particularly upbeat, positive manner to sell a radical new agenda, and we are constantly hearing how their programmes will be "beautiful", "tremendous" or perhaps just plain "great". The adjective that has been chosen to apply most often to their tax-cutting plans has been "historic", so why hasn't there been more of a reaction to Treasury Secretary Steven Mnuchin giving us an outline -- as he described it -- of the administration's intentions yesterday ?
Well, most obviously the clue is in the word "outline". The lack of detail in Mr Mnuchin's statements was again a big disappointment if not exactly a surprise, and one gets the impression that the administration is keen just to get something (anything ?) positive out there ahead of the President's 100 days in office. One might also form the opinion that on an almost daily basis they are discovering that the realities of life in government can be extremely frustrating -- getting things done is much more difficult than it is in an autocratic business empire (for example). They're going to need plenty of patience -- negotiations with Congress can be pretty tortuous and in some key areas there's absolutely no guarantee of a successful outcome.
Anyway, to take just three things form what was announced yesterday ......
We reckon that the simplification of personal tax codes (seven brackets into three) must be considered a good thing on balance -- the US taxation system is greatly over-complicated, though they're hardly alone in that. An overall bias towards lowering personal tax rates will also be largely welcomed but with two caveats, one political and one fiscal. They'll need to get the right balance between tax relief for the wealthy and the less well-off (and the pre-election rhetoric did not always inspire confidence that this would be the case), and they'll need to be able to pay for it of course (more of which in a minute).
The plan to offer US corporates a one-off, low-rate deal to repatriate assets held abroad also has merit, particularly if those corporates can be encouraged (coerced ?) into using the repatriated money for job and growth-producing investment rather than self-serving share buy-back schemes , for example. Some might argue that companies have their own reasons for keeping money abroad and only a portion would find its way back to the US, but the offer's attractiveness cannot really be judged until that rate is decided (the speculation is for 10%). It's an example both of the frustrating lack of detail and the lengthy horse-trading with Congress (in this case, over the rate) that we were just talking about.
The most contentious issue is that of Corporation Tax, where the intention is to slash the current rate of 35% down to 15%. Conventional thinking would have it that this could inflame the budget deficit, which would alienate the hawks within the the Republican Party. If one assumes that the Democrats by nature would be opposed to such a move, there's plenty of reason to think that opposition to such a radical measure could not be overcome.
Which is really why there was so little reaction to Mr Mnuchin's comments -- a lack of detail about the proposals, and a lack of confidence that they could be passed into law. On the face of it, the Trump Reflation trade of higher stock prices and lower bonds should get a big boost from these three areas, promoting as they do higher consumer spending, investment in growth and higher budget deficits . In the event, stocks moved marginally lower, bonds marginally higher.
You know, for all the new ground we are supposedly breaking under Mr Trump, much of what will happen will revolve around two old and equally contentious economic theories -- the Laffer Curve, and the Trickle Down theory of wealth.
We've been here before with the Laffer Curve -- you may remember that it's a representation of the relationship between tax rates and the amount of revenue collected by government in taxes. Obviously, if you tax at 0% then there is no revenue and if you tax at 100% there is also no revenue since nobody has any incentive to do anything. The optimum lies somewhere between the two of course, and Arthur Laffer (nothing if not an agitator for right-wing economic theory) contends that the optimum lies a pretty long way towards the lower end of the scale of tax rates. The reduction in direct taxation will be more than covered by the boost to growth, says the theory. Actually, WITHIN REASON the theory has its attractions but there are two main problems with it : Firstly, nobody has ever discovered what the optimum level might be, and secondly there is no evidence that it actually works. In fact, Ronald Reagan and George W. Bush both lowered taxes and the budget deficit went up, while Bill Clinton raised taxes and the deficit went down.
The Trickle Down theory of economics at its most basic states that benefits for the wealthy trickle down to everyone else .... tax cuts for the wealthy for example lead to spending, investment and job creation which mean benefits for the man and woman in the street. Whether you adhere to the theory or not, it's not hard to see how it would be a difficult sell politically for those with a left-of-centre bias ..... to put it mildly. We need to remember that a key demographic in Mr Trump's election victory was the hard-pressed electorate of the rust-belt. If it's perceived that the wealthy are benefitting from the President's new tax measures to the exclusion of everyone else, Mr Trump will have made a whole heap of trouble for himself.
Still, that's some way down the line. For now, some clarity would be nice ..... though as Mr Trump is finding out, what one wants is not necessarily what one gets.