Officials are open to the possibility that the tax cut will raise the economy’s potential growth rate, although it isn’t their base case
conventional wisdom is that this is the wrong time for Republicans to cut taxes by $1.4 trillion over the next decade. The fiscal stimulus will overheat the economy and force the Federal Reserve to slow it down by raising interest rates more aggressively.
inflation is still too low, and that completely changes the equation: It suggests overheating is to be welcomed, not resisted.
officials are open to the possibility that the tax cut will raise the economy’s potential growth rate, which means faster growth wouldn’t necessarily lead to more inflation.
.. Ms. Yellen and her likely successor, Fed governor Jerome Powell, aren’t yet the party poopers many supply-side tax cut advocates feared.
.. [Larry Kudlow: ] The real test, he said, is how the Fed reacts if growth tops 3%
.. By 2020 Fed officials expect their benchmark federal-funds rate to reach 3.1%, which would be above the 2.8% they expect to prevail in a fully-employed economy growing normally
.. Ms. Yellen made it clear she didn’t agree with Mr. Trump and Treasury Secretary Steven Mnuchin that the tax cut would pay for itself, and warned it may be “taking what is already a significant [debt] problem and making it worse.”
Republicans Feel Triumph, Fear Tragedy
Tax plan, Mueller’s Russia probe help produce two potential divergent paths
.. The Republican establishment’s bargain with Mr. Trump always has been essentially this: It is worth putting up with his excesses and an undercurrent of mutual mistrust because ultimately he would promote and then sign the Republicans’ long-sought tax cut.
.. Republican plans to make Democratic House leader Nancy Pelosi rather than Mr. Trump the unpopular face of the election year succeed... Trump voters decide the party and the president they supported in 2016 don’t share their common-sense aversion to running up big bills and leaving them for the kids... Meantime, a failure to agree on a new spending bill forces a government shutdown just before Christmas, and the GOP fails to put the blame off on Democrats. That instantly sullies Republicans’ newfound reputation for governing effectively... Corporate leaders don’t make the kinds of job-creating investments Republicans predict. Meanwhile, the tax cut’s stimulative effect overheats an economy already near full employment, pumps up an overextended stock market and compels the Fed to keep raising interest rates. The bubble bursts.The Obamacare infrastructure also collapses in 2018, and Republicans now are the party bearing the blame for health-market chaos.
.. Trump world financial entanglements with Russians gave the Kremlin leverage over the eventual president, and it’s shown Mr. Trump obstructed justice to stop investigators from finding out.
As the global economy picks up, inflation is oddly quiescent
But central banks are beginning to raise interest rates anyway
.. Turkey, perhaps the only big economy that is obviously overheating, the central bank—which has been browbeaten by the president, Recep Tayyip Erdogan, who believes high interest rates cause inflation—opted on October 26th to keep interest rates on hold... three elements: the price of imports; the public’s expectations; and capacity pressures (or “slack”) in the domestic economy. Start with imported inflation, which is determined by the balance of supply and demand in globally traded goods, such as commodities, as well as shifts in exchange rates. Commodity prices have picked up smartly from their nadir in early 2016. The oil price, which fell below $30 a barrel then, has risen above $60... Leave aside the transient effects of import prices, and inflation becomes a tug-of-war between expectations and a third big influence, the amount of slack in the economy... As the economy approaches full employment, the scarcity of workers ought to put upward pressure on wages, which companies then pass on in higher prices. On some measures, Japan’s labour market is as tight as it has been since the 1970s. America’s jobless rate, at 4.2%, is the lowest for over 16 years. Inflation has nevertheless been surprisingly weak... the trade-off between unemployment and inflation, known as the Phillips curve, has become less steep... a drop in the unemployment rate in America has less than a third as much power to raise inflation as it did in the mid-1970s... the flatter Phillips curve suggests that the cost for central banks in higher inflation of delaying interest-rate rises is rather low.
Why Corporate Tax Cuts Won’t Create Jobs
I have never heard someone say, “I would have started a company, but tax rates were too high” or “I wouldn’t have started this company, but then George W. Bush cut tax rates, so I did.”
.. While I can imagine tax regimes that would create disincentives for entrepreneurship, we don’t have that situation today in America, where tax rates on capital gains (the primary way that founders of successful start-ups make money) are already far lower than rates on ordinary income. Indeed, some of the most admired entrepreneurs — Bill Gates, Steve Jobs, Jeff Bezos — started their companies under significantly higher tax regimes.
.. As Warren Buffett notes, “I have yet to see” anyone “shy away from a sensible investment because of the tax rate on the potential gain.”
.. My team and I are already intensely motivated to expand the company we manage, and lowering the corporate tax rate isn’t going to make us create jobs any faster.
.. What a tax cut would do is increase our post-tax profitability, which effectively transfers money from the federal government to our shareholders. One consequence of this would likely be a one-time increase in our stock price, but with no impact on our operations or employment plans.
.. but with interest rates at historical lows for years, American corporations have had no trouble getting capital.
.. By 2027, when they are fully phased in, four out of every five dollars in proposed tax cuts will flow to the top 1 percent, an egregious wealth transfer to those who least need it.
.. I believe tax cuts that deepen our already severe inequality in income and wealth are not in the long-term interests of any citizens, not even the very wealthy. Extreme inequality is corroding our civil society, poisoning our politics, and undermining our effectiveness as a nation.