If You Lower It, GDP Will Grow

Is President Trump living in a “Field of Dreams” or will his proposed “massive” tax cut grow the economy enough to make up for the trillions of dollars of lost revenue? That is the question on the minds of economists and individual taxpayers, as well as, and most importantly, the politicians who will vote on this proposal.

Today President Trump unveiled his long-awaited tax cut proposal which looks to reduce rates on businesses, as well as to repatriate corporate profits which currently reside outside of the United States.

In his opening salvo, President Trump called upon the Treasury Secretary Steve Mnuchin and economic advisor Gary Cohn to lay out the president’s blueprint. A one-page document, which stated the core elements of his plan, revealed a call for raising standard deductions for individuals, repealing inheritance taxes on the states, and simplifying tax returns.

As reported by Reuters, “Mnuchin called the proposals "core principles" that would be worked on with Congress to produce a bill that can be passed. In answer to questions, he said the plan would pay for itself through economic growth, and by reducing tax deductions and closing loopholes.”

"Our objective is to make U.S. businesses the most competitive in the world," he said. "The president is determined to unleash economic growth for businesses."

Obviously, such a sweeping proposal will have advocates, as well as opponents, regarding implementing this new tax proposal. Proponents of this philosophy believe that a massive tax cut will result in an extreme growth in economy and GDP which will make up the deficit of revenue created by taking in fewer taxes.

Proponents, however, believe that reducing corporate tax from 27% to 15% could produce an additional $2 trillion to our already massive national debt. Proponents also believe that a lower tax structure within increased profits to corporations would not necessarily create new jobs, rather it would create additional investments as well as buybacks of stocks.

The key is that the net result of such a dramatic proposal will not be known for years. As such, we could be digging ourselves deeper into debt and, over time, creating havoc upon our ability to fund government projects. On the other hand, if proponents of this proposal are correct, the lost revenue would be made up as GDP grew with the additional revenue being taxed at a lower rate and effectively making up the differential created by a tax reduction.

There is no doubt that this proposal and its core principles are just an opening salvo to be presented to Congress as a cornerstone of a new tax reduction bill. Since Congress is still extremely polarized, any finalized bill must please the opposing factions, which could be as hard to pass as building a field of dreams.

Wishing you as always, good trading,