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posted on 30 November 2017

The Tax Bill Is A Fiscal Disappointment

Written by , Clarity Financial

I encourage you to take a few minutes to review my previous analysis of the effectiveness of tax cuts on the economy.

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The Committee For A Responsible Budget penned after the passage of the tax bill:

The House approved debt-financed tax cuts based on predictions of magical economic growth that defy history and all credible analyses.

Tax reform should grow the economy and not add to the debt. Unfortunately, lawmakers are assuming faster economic growth will pay for that debt increase when there is no evidence it will cover more than a fraction of the tax bill’s costs.

The last time Congress added 10-figures worth of tax cuts to the debt in 2001, it blew a hole in the budget and helped erase our surpluses - despite claims that economic growth would cover the cost.The growth fairy did not appear then, and it would be unwise to assume she will this time around."

Read that again.

Despite claiming to be “fiscally conservative," what is so amazing is that Republicans are considering doing this when debt is at the highest level in history and climbing.

When the “Reagan" tax cuts of were passed, debt was less than 50% of GDP, inflation and interest rates were high and falling, and the economy was just recovering from back to back recessions. When the “Bush" tax cuts were passed, debt to GDP was only slightly higher than under Reagan but despite the tax cuts, the economy slid into a recession compounded by the “" bust.

Currently, debt is 104% of GDP - higher than any time in history, the economy has been in a 9-year expansion at the lowest rate of growth on record, and interest rates and inflation are low with the Fed hiking rates and reducing monetary support.

The situation currently is much more like Bush versus Reagan.

Lastly, despite the continuing “talking points" that “tax cuts" spur economic growth and will pay for themselves over time….there is no evidence to support that claim.

Given we are projected to borrow another $10 trillion over the coming decade. Republicans should be looking for “fiscally responsible" tax reform rather than piling another $2.2 trillion on top of it.

As the CRFB concludes:

“Instead of trickling down economic growth, the House plan will unleash a tidal wave of debt that will ultimately slow wage growth and hurt the economy."

The market WILL figure this out eventually, and the consequences will not be good.

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