GDP Growth & Tax Cuts

Retirement, Income, Tax & Estate Planning.

GDP Growth & Tax Cuts

December 8, 2016 Newsletter Taxes 0

With President-Elect Donald Trump putting together his team, much talk is centered around the 282 campaign promises Trump made on the campaign trail.  Many of them centered on growing the economy and cutting taxes.

We know that all politicians make campaign promises they can’t fulfill so none of us will be surprised if the same thing happens again.  We even know, based on his key staffers, that we were all pretty naive to believe Trump’s promises.  They were just campaign promises… not to be taken literally… so said his aides.  Trump was just being provocative.  Who knew?

As for growing the economy, in my October 21st newsletter I wrote about how the U.S. has been a 2%  growth economy, more or less, for many decades.  Will it change now to 3.5% or 4% growth?  Doubtful, but I hope it does. In a Wall Street Journal article earlier this week, the author makes the case that stepping up growth will be hard for two reasons: an aging population and stagnant productivity growth. (Read article here.) 
The aging population factor is the easy one to fix: allow more legal immigration.  The tougher problem is how to improve worker productivity.  To do this, companies will deploy more technology, robots and automated processes… which hurts employment.  So it’s not a win-win game.
As for the promised tax cuts, Congress will most likely put together a plan to lower taxes… without cutting spending.  The theory is called “dynamic scoring” which harkens back to Reagan’s “trickle-down economics”.  If you cut taxes, especially for the wealthy, then they will spend more and the economy will grow faster which then puts more money in the pockets of the lower classes.  I’ll leave that to the experts to determine how that will work out this time around.

Here’s the thing… with the tax cut proposed, those in the highest income brackets will also see the larger percentage of tax cuts.  Again, according to a recent Wall Street Journal article (read here), taxes will go down but there is a “but”.  Here is the headline of the article:

Taxes Under Trump: Almost Everyone Pays Less and the Richest Pay a Lot Less

Nearly half the benefits of the plan, and a higher proportion of savings, would go to the top 1%!

Bottom line… it’s way too early to handicap the sausage-making process yet to come as Congress tries to put together new budget and tax policies.  As a political junkie, it’s going to be fascinating to watch.