Trump’s Tax Cuts, Budget And Deficits: Recession 2019?

| Educate!

Above Photo: U.S. stocks lower at close of trade. | Photo: Reuters

Trump tax cuts and Trump’s budget will exacerbate U.S. budget deficits and debt and cause the central bank to raise interest rates even faster and higher.

Lies and misrepresentation of facts have become the hallmark of U.S. politics in recent years more than ever before. Not just lies of commission by U.S. President Donald Trump and his crew, but lies of omission by the mainstream media as well.

In Trump’s recent package of tax cuts for corporations, investors and millionaires, the lie is that the total cuts amount to US$1.5 trillion — when the actual amount is more than US$5 trillion and likely even higher. And in his most recent announcement of budget deficits the amounts admitted are barely half of the actual deficits — and consequent rise in U.S. national debt — that will occur. Even his US$1.5 trillion so-called infrastructure spending plan, that Trump promised during his 2016 election campaign, and then throughout 2017, amounts to only US$200 billion. The lies and exaggerations are astounding.

The mainstream media, much of it aligned against Trump, has proven no accurate in revealing the Trump lies and misrepresentations: They echo Trumps US$1.5 trillion total tax cut number and provide no real analysis of the true total of the cuts; they low-ball the true impact of Trump’s budget on U.S. annual budget deficits and the national debt; and they fail to expose the actual corporate subsidy nature of Trump’s “smoke and mirrors” infrastructure plan.

Trump’s multi-trillion dollar tax cuts for business, investors and the wealthiest 1 percent, plus his annual trillion dollar deficits as far as the eye can see, plus his phony real estate industry handouts that parade as infrastructure spending together will lead the U.S. economy into recession, most likely in early 2019. Here’s the scenario:

The massive deficits will require the central bank, the Federal Reserve, to raise short term interest rates. What’s called the benchmark federal funds interest rate will rise above 2 percent (currently 1.5 percent). The longer term 10 year U.S. Treasury bond rate will rise to 3.5 percent or more. Those rates have already been rising — and their rise already provoking stock and bond market corrections in recent weeks which should be viewed as “dress rehearsals” of more serious financial asset market retreats and contractions yet to come.

As this writer has argued repeatedly in recent publications, both the U.S. real economy and financial markets (stocks, junk bonds, derivatives, etc.) are “fragile” and increasingly susceptible to a significant downturn. In 2007-08 central bank interest rates rose to 5 percent and that precipitated a crash in subprime mortgage bonds and derivatives that set off the contraction in the economy. With the U.S. economy not fundamentally having recovered from 2008-09 still to this day, and with household and corporate debt well above levels of 2008, it will take less of a rise in interest rates to provoke another similar reaction.

The U.S. real economy is already weak. GDP numbers don’t reflect this accurately. Important sectors like autos and housing are softening or even stalling already. Consumption will falter. Consumers have loaded up on household debt. At US$13.8 trillion, levels are equal or greater than 2007. They have also been depleting their savings to finance consumption in 2017-18. And despite all the recent media hoopla, there’s been no real wage gains occurring for 80 percent of the workforce in the U.S. Moreover, renewed inflation now occurring will reduce households’ disposable income and buying power even more this year. Rising taxes for tens of millions of households in 2018-19 will also negatively impact consumption spending. Don’t expect consumption to rise in 2018 as interest rates, taxes, and prices do. Just the opposite. Consumption makes up 70 percent of the U.S. economy and it is now nearly exhausted. It will stagnate at best, and even retreat steadily beginning in the second half 2018.

Like the real economy, the U.S. financial markets are fragile as well. They are in bubble territory and investors are getting increasingly edgy and looking for excuses to sell — i.e. take their super capital gains of recent years and run to the sidelines. A rise in rates much above the 2 percent and 3.5 percent noted will provoke a significant credit contraction (or even freeze). Money capital (liquidity) will dry up for non-bank companies, investment and production will be scaled back, layoffs will rise rapidly, and consumption will collapse—together bringing the economy down. It’s a classic scenario the forces behind which have been steadily building. And it won’t take too much more to provoke the next recession—likely in early 2019. The Federal Reserve’s plans to hike rates four more times this year will almost certainly set the scenario in motion.

Trump’s US$5 Trillion Business-Investor Tax Cuts

Trump & Congress — with the mainstream media in train — say the Tax Cut Act just passed amounts to US$1.5 trillion. But that’s not the true total value of the business tax cuts. That’s what they claim is the deficit impact of the tax cuts. (But even that deficit impact is grossly underestimated, as will be shown shortly).

Here’s the true value of the business-investor tax cuts:

1. US$1.5 trillion cut due solely to reducing the corporate nominal tax rate from 35 percent to 21 percent.

2. Another US$0.3 trillion for the new 20 percent tax deduction for non-corporate businesses (lowering their effective tax rate from 37 percent to 29.6 percent).

3. US$3 trillion more for ending the business mandate for the Affordable Care Act

4. Still another, at minimum, US$0.5 trillion for a combined accelerated business depreciation write-offs (a form of tax cuts for writing off all equipment added by business in the year purchased instead of amortized over several years); plus repeal of the Alternative Minimum Tax for Corporations: and a roughly halving of the AMT for individuals. But that’s not all.

5. The wealthiest 1 percent households, virtually all investor class, get their nominal individual income tax rate reduced from 39.6 percent to 37 percent. Moreover, the 39.6 percent did not kick in until an income level of US$426,000 was reached. Now the threshold for the even lower 37 percent does not start until US$600,000 income is reached. All that amounts to at least another US$0.5 trillion in tax cuts.

That’s a total of US$3 trillion so far in tax cuts in the Trump Plan. But the further, really big tax cuts come for U.S. Multinational Corporations. Their “take” will be another US$2 trillion in tax reduction over the next decade.

The Multinationals have hoarded between US$2-2.7 trillion in cash offshore in order to avoid paying taxes on their earnings. But that US$2 trillion is a gross underestimation. First of all, it’s a figure for only the 500 largest US multinationals. What about the hundreds of thousands of other US corporations that also have foreign subsidiaries in which they park their cash to avoid taxes? And what about the unreported cash and assets they’re hoarding in offshore tax havens in the Cayman Islands, Bermuda, Vanuatu and elsewhere? That too is not part of the US$2.-$2.7 trillion. Another reason to doubt the US$2 trillion is accurate is that they already had $2 trillion stuffed away offshore back in 2011-12. According to the business periodical, Financial Times, the largest US corporations by January 2012 “are collectively sitting on an estimated US$2,000bn of cash”. Does anyone believe they stopped diverting profits and cash offshore after 2011-12 for the past five years?

If one conservatively estimates there’s US$4 trillion in cash stuffed offshore to avoid taxes (accumulating since 1997 when Bill Clinton conveniently allowed them to begin doing so), the new Trump tax act allows them to pay a tax of only 10 percent on average if they “repatriate” (bring back) that cash. If they paid the prior 35 percent tax rate, it would cost them US$1.4 trillion in 2018-19, the first year of the Trump tax. But estimates of this provision in the Trump bill show they plan to pay only US$339 billion. So they will be saving approximately US$1.061 trillion in the first year alone. Thereafter for the next nine years they pay only 8 percent to 15.5 percent, instead of the 35 percent. That amounts to at minimum another US$1 trillion in tax savings for multinational U.S. corporations under the Trump tax.

6. In short, U.S. multinational corporations will get a tax reduction of at least US$2 trillion

The Trump tax cuts for businesses and investors thus total US$5 trillion over the next decade!

So how do Trump, Congress, and the media get to only US$1.5 trillion? Here’s how they do it:

They raise taxes on the middle class by US$2 trillion in the Trump tax plan. That leaves the US$5 trillion in business-investor cuts, minus the US$2 trillion in middle class tax hikes, for a net US$3 trillion in cuts. But they admit to only US$1.5 trillion in net tax cuts. So where’s the difference of the other US$1.5 trillion? That difference is assumed to be “made up” (offset) by the U.S. economy growing at a GDP rate of 3-3.5 percent (or more) for the next ten years — i.e. more than 3 percent for every year for ten more years without exception!

That 3-4 percent annual overestimated economic (GDP) growth for the U.S. economy is based on ridiculous assumptions: that slowing long term trends in U.S. productivity and labor force growth will someone immediately reverse and accelerate; that the U.S. will now grow at double the annual rate it did the previous decade; and that there’ll be no recession for another decade when the historical record shows the typical growth period following recession is 7-9 years and the U.S. economy is already in its 8th year since the last recession. (If there’s a recession, then the annual GDP growth for nine years will have to average close to 5 percent a year—a figure never before ever attained!).

It’s all Trump “smoke and mirrors,” lies and gross misrepresentations. But no matter, for its really all about accelerating the subsidization of corporations and capital incomes for the wealthiest 1 percent by means of fiscal policy now that the central bank’s 9 years of subsidization of capital incomes by monetary policy (i.e. near zero rates, QE, etc.) is coming to an end.

Trillion Dollar U.S. Deficits for Years to Come

The U.S. budget deficit consequences of the Trump tax cuts are therefore massive. Instead of averaging US$150 billion a year on average (the US$1.5 trillion) the effect will be three to four times that, or around US$300 to US$400 billion a year!

On top of that there’s Trump’s latest U.S. budget, which projects another US$300 billion for the next two years alone. With the majority of that total US$150 billion a year caused by escalation of the Defense-War budget as the U.S. builds up its tactical nuclear, naval and air forces in anticipation of more aggressive U.S. moves in Asia. Last year’s budget deficit was US$660 billion. The Congressional Budget Office estimates deficits of US$918 billion by 2019. Independent estimates by Chase bank put it at US$1.2 trillion. And that’s just the early years and assuming there’s no recession, which will balloon deficits by hundreds of billions more in reduced tax revenues due to a contracting U.S. economy.

Independent projections are for U.S. deficits to add US$7.1 trillion over the next decade. But that’s an underestimate that assumes not only no recession, but also that defense-war spending will not rise beyond current projection increases, and that government costs for covering price gouging by the healthcare and prescription drug industries (for Medicaid, Medicare, CHIP, government employees) will somehow not also continue to accelerate. The likely true hit to U.S. deficits — and therefore the U.S. national debt — will well exceed US$12 trillion! The US could easily see consecutive annual budget deficits of US$1.5 trillion. That will mean a US debt total rising from current US$20 trillion to US$32 trillion (or more) over the coming decade.

From Tax Cuts, Deficits & Debt to the Next Recession

How does this potentially translate into recession? Here’s a very likely scenario:

The U.S. central bank, the Fed, has already begun raising interest rates. That has already begun slowing key industries like auto and housing. It will soon impact consumers in general, who are near-maxed out with credit card, auto, student loan, and mortgage debt, and facing further accelerating inflation in rents, healthcare costs, transport, state and local taxation, and prices for imported goods.

The massive deficits will require the central bank to raise interest rates perhaps even faster and higher than before. Slowing foreigners’ purchases of U.S. government bonds to pay for the accelerating debt, may require the Fed to raise rates still further. It’s 2007-08 all over again!

Rising Fed interest rates and inflation will also continue to depress bond prices. That has already begun, and to spill over to stock prices as the major contraction in stock prices in February 2018 has revealed. Both bond and stock prices are headed for further decline.

Should stock market prices correct a second time this year, this time by 20 percent or more, the contagion effects across markets will result in a general credit crunch for non-financial corporations and businesses. U.S. corporate debt has risen even more than U.S. household or government debt since 2009. The corporate junk bond markets will experience a crisis, as U.S. Zombie companies (i.e. those in deep debt, an estimated 12 percent to 37 percent of all U.S. corporations, depending on the source) cannot get new financing and begin to go bankrupt.

These stock and bond market effects, and emerging Zombie company defaults, will result in a general investment pullback by non-financial corporations. That will mean production cuts that result in layoffs and further wage stagnation and slowing consumption spending. The next recession will have begun.

The Central Bank (FED) Will Precipitate the Next Recession — As It Did in 2007

This scenario is all the more likely if the general argument that the U.S. economy is both financial and non-financially weak and fragile is accurate. The weakness in the real economy and fragility in the financial markets mean that Fed interest rate hikes cannot exceed 2.0 percent, and longer term rates (10 year Treasury bonds) cannot exceed 3.5 percent, before the system “cracks” once again and descends into recession. With the Fed rates at 1.5 percent and approaching 2 percent and the Treasury at 3 percent and approaching 3.5 percent, the U.S. economy today is well on its way to approaching its limits.

Just as it was interest rates peaking in 2007 that precipitated (not caused) the crash in (subprime) mortgage bonds, that then spilled over through financial derivatives to the rest of the credit system — ·today the bond markets may once again be signaling the “beginning of the end” of the current cycle. The new contagious derivatives may not be mortgage based bonds and CDO and CDS financial derivatives, as in 2008; the new financial contagion will be driven by the new financial derivatives — i.e. Exchange Traded Funds(ETFs), and related ETNs and ETPs — with their effects amplified by Quant hedge funds’ automated algorithm-based trading.

In summary, Trump tax cuts and Trump’s budget will exacerbate U.S. budget deficits and debt and cause the central bank to raise interest rates even faster and higher. Those rate hikes cannot be sustained. They will lead to another credit crisis — this time even sooner than they did in 2007 given the even weaker U.S. economy and more fragile financial markets. The next recession may be sooner than many think.

  • lcotler

    Wow! WFD. Only Maj. Gen. Strike can save us now.

  • TecumsehUnfaced

    For that our kleptocrats have imported Israeli thuggery techniques for subduing a conquered population. Kind of goofy of us not to be concerned about the brutality that the Zionists were exercising on the Palestinians, or about that being done by our own brainwashed uniformed thugs. That’s coming home now.

  • KennyB

    If tens of millions of unarmed Americans march on Washington D.C. while appealing to the humanity of the individuals in the police and military to not shoot at their unarmed fellow citizens, maybe you can turn this around.

    Any sort of armed insurrection will be brutally suppressed.

    A peaceful revolt is hard to resist, as Gandhi proved to the British.

  • TecumsehUnfaced

    Gandhi didn’t prove anything to anybody. The British didn’t leave because of him or his movement. They left because of Subhas Chandra Bose’s work among the Indian soldiery trained by the British. They could see an even more ferocious revolt than the one in 1857 coming. They ran in order not to get massacred.

    Besides, how are you going to organize tens of millions of people without all the wrong people knowing about it?

    You need to think subtler than that. Hire a few hundred lawyers perhaps. Try marching them instead.

  • KennyB

    Admittedly, I chose a bad example. There are better examples where passive resistance worked.

    As for how to organise it? Dunno. It’s your problem but I hope that you Americans crack it before your crazy Military-Industrial-Congressional Complex destroys the planet.

  • TecumsehUnfaced

    Better examples? Where?

    It’s not my “crazy Military-Industrial-Congressional Complex”. The ones that built it and own it also own your country too. Like it or not, we share the same sinking ship with riddled life boats. I feel like the sailors on the U.S.S. Liberty.

  • kevinzeese

    Change requires lots of people taking differnt actions. You are foolish not to give Gandhi any credit and give all credit to violence. It shows your bias in favor of violence and explains you strange dislike of Chris Hedges. Now we are starting to understand where you are coming from.

  • TecumsehUnfaced

    You are being foolishly and obtusely insulting. I never said that Gandhi might have not helped a little. But he had very little weight with the Indian military, while Bose held tremendous weight and respect with them. I merely pointed out the truth that the immense threat of violence was what made the British skedaddle. It showed no bias for violence, only a bias for historical truth. Nor did I ever say I dislike Chris Hedges. I like him very much. He’s a nice, very perceptive guy, but he travels old roads for me, hence he’s boring.

    I’m sorry that you weirdly equate liking someone with adulation. It’s very sad that people not ascribing to the same hagiographic perceptions provokes childish maledictions from you.

    “Now we are starting to understand where you are coming from.”

    Who’s this “we” you are talking about. You understand nothing about me. Why are you operating so shallowly and extrapolating so irresponsibly? I abhor violence, never indulge in it, or promote it. But unlike you, I know that it is a constant threat and must be planned around. I also know that there’s a lot of truth in the the old aphorism, “Power steps back only before greater power.” You just want to go out there with as big a mob as you can and yell. That’s the way you get kettled, maybe arrested, maybe beaten, maybe…

    In conclusion, you disappoint me hugely with your McCarthyite attitudes. I thought you were better than that.

  • KennyB

    It’s true that all NATO members are at risk because of their association with the Evil Empire, however, it’s an American flag flying above those 800+ military bases around the world. I also attribute responsibility for the MIC to “you Americans” and not you as an individual. All Americans who disagree with the Military First doctrine (it’s most certainly NOT “America First”) can defeat the Evil Empire, as difficult as that will be, or eat pretzels and drink beer while watching mindless sport on your Chinese-made flat screen TVs that you bought at Walmart until CNN starts showing WWIII live.

  • TecumsehUnfaced

    Not all the governments owned by the shmucks that own us are NATO members. You need to follow the money.

  • KennyB

    I’ve been “following the money” since 1980. I’ve earned my certificate as a so-called “Conspiracy Theorist”. Of course, if there’s proof, then it’s conspiracy fact, not “theory”. It has, of course, always been about the money, but more so since the middle ages.

  • TecumsehUnfaced

    Then this thing less than two years old should be fun for you.

    corbettreport
    Published on Apr 11, 2016
    SHOW NOTES AND MP3: https://www.corbettreport.COM/?p=18377
    Clocking in at 1300 pages of small print text, Carroll Quigley’s seminal work, Tragedy and Hope, is an intimidating and weighty tome. Today we talk to Joe Plummer of JoePlummer.COM about his guide to Quigley’s massive book. Available as a free e-book or as a paperback or kindle purchase and dubbed Tragedy and Hope 101, Plummer’s guide condenses, summarizes, explains and footnotes the highlights and lowlights of the text so you can understand the nature of the conspiratorial network that Quigley exposed and why this information is so important.
    https://www.youtube.COM/watch?v=SUWxApj0F-M

    If you like this and want to pursue it, do a search on “Joe Plummer” and Joseph Plummer.

    Evidently, he’s still alive.