THE REPUBLICANS are celebrating a Christmas present of one of the most sweeping tax cuts in the history of the country. The biggest benefactors are corporations, whose tax rates were cut from 35 percent down to 21 percent, a slash of 40%.
Other specific areas have been dramatically changed, such as a child tax credit increase from $1,000 to 2,000 (and from $1,000 to $1,400 for those who pay absolutely no taxes at all). However, the individual exemptions for each person in a household are totally gone under the new bill, creatively offsetting that child tax credit for taxpayers from a 100 percent benefit to an approximate 15 percent one. Even though the number of brackets has not changed from the original seven, the tax burden overall appears on the surface to have benefited almost everyone. Hard math though, shows this is not necessarily the case.
My purpose here is not to get into number crunching to test who, hypothetically, will stand to benefit and who will not. I think some situations cannot yet be tested and it will remain to be seen how it all plays out.
Because there are other implications to this bill that have not been considered.
For one thing, the economy has been booming. Now that taxes have been lowered for corporations, which have seen record profits, low inventories, huge bonuses for executives and stock prices soaring, what could possibly go wrong?
The Federal Reserve (Fed) is not a government agency, contrary to popular belief. It is the central bank of the United States that controls monetary policy. And when the economy gets rolling a little too fast, perhaps on steroids, the first thing that happens is a more aggressive approach by the Fed to slow down inflation by tightening up money supply. This is done by raising interest rates.
Rate increases were foreseen anyway, since the GDP has been inching up and unemployment has been ticking down. The housing market is back on a roll and inventories are way down in most areas across the country. But now, with this tax bill passing, it is almost assured that the Fed will take an aggressive approach to rate increases in 2018. This approach will certainly negate positive impacts of the tax bill as soon as next year.
Exactly what impact will it have?
The idea is to slow things down. So first, short term rates will rise, which include fluctuating mortgages (ARM’s), credit card interest rates and of course, the prime lending rate. It eventually carries over into the longer term rate market, which includes mortgages.
Rate increases tend to have a stifling effect on the stock market as well, stopping upward climbing charts and causing bonds to drop below par value. The reason bonds drop in value is simple. People can purchase new ones paying higher interest rates so why would they want the one you are holding that pays a lower rate? This drives the value of your bond down, whether it’s a Treasury bond, Municipal bond, or a corporate bond. It will cost lenders more to loan money in the form of bonds due to rate hikes.
Sometimes, the stock market factors in small rate increases spaced rather far apart, and it’s not a problem in the long run for a bull market. But if the economy is growing too fast and people are borrowing too much money and leveraging too much debt, the Fed raises rates faster and in bigger steps. This happened in 1994 when there were six rate increases in one year.
The end result is a negative effect on the market, which tends to impact the entire economy. People start losing confidence and consumer purchases drop. Inventories build. Layoffs begin. And everything slows down. The goal of the Fed is to try and find a happy medium.
But, to use my most favorite phrase, I said all that to say this:
Why did the Republicans need to pass massive tax legislation right now?
With a booming economy, soaring stock market, running real estate market, low unemployment, record corporate profits and dividends, and a strong housing market, what is there that needed fixing? And why now?
Well first, there was some kind of psychological desire to prove that this Republican dominated legislative/executive branch government could pass a huge bill. And next, there was tremendous pressure from corporate lobbyists who were promised sweeping corporate tax cuts. Their pressure equates to midterm election votes next November.
Look, you can’t have it both ways.
Trump supporters cannot credit him for an economy on steroids, point to a Dow on the fringes of 25,000, and then say that it needs to be fixed. Either it is broken, and everything we are seeing is just artificial exuberance tossed at a “President who is a businessman”, or it’s an economy running on its own cylinders in spite of whomever is in power.
But it also can’t be a strong “look what Trump is doing!” economy and still need to be fixed and fixed right now!
What could they have done?
They could have waited a year, until 2019, fine tuned the bill and not been so rushed to prove they could pass something. Or, they could have just gotten rid of the ObamaCare mandate for those who choose not to buy insurance, and then put in place four tax brackets instead of seven, and lowered the corporate rate to 30 percent instead of 21 percent.
But that would not have appeased the lobbyists.
If it ain’t broke….
Janice Barlow is a True Crime author whose books are on Amazon in Kindle and paperback. She also has written a book about her beloved greyhound, Daisy, and is currently at work on her next book about agent orange poisoning.