President Trump is unusually ebullient when it comes to political victories. And with an obstructionist Congress and insurgent press, they have been rare indeed. However, there was a lot of crowing over the holidays as the Tax Reform bill squeaked through Congress on a purely partisan vote. President Trump, along with Congressional leaders such as Paul Ryan and Mitch McConnell, is very vocal about taking responsibility for the “largest tax cut in our country’s history”. Some enthusiasts are happy with the result. Many other analysts are not sure how this mixed bag will shake out. The left is spewing doom and gloom as usual. The one dynamic that few have mentioned is that with this bill, Trump and the Republicans have put themselves on the hook for the next inevitable economic downturn.
First, the bill is only a “tax cut” in limited terms. It is more like a re-shuffling of priorities. Most analysts agree that about 80% of the population will see a tax cut in some form or another, while another 20% may actually pay a bit more. The cut in the corporate tax rate, and more particularly for pass-throughs, holds great potential in repatriating foreign-held assets and in stimulating business in general, both large and small. Look for a windfall for CPAs and tax lawyers as a lot of high earners scramble to reorganize their business entities to take advantage of the new rules. The rise in standard deductions will benefit almost everyone in the lower and middle tax brackets with the exception of individuals living in high tax states, where property tax deductions have been limited to $10,000.
If you are a high itemizer and regularly exceed the standard deduction limits (even with the new higher figures) you may see a small increase in tax burden. This puts residents of states with high-value real estate, like California, New Jersey, New York, Massachusetts, and Illinois in a compromised position. The average property tax bill on a nice, solid middle class home in New Jersey is about $20,000 annually. Stick that same house in Draper and the bill is about $2,800 annually. Thus low tax states Like Nevada, Texas, Utah, Idaho, Wyoming, Montana, Tennessee, Missouri, Alabama and many other states will not feel this disadvantage. However, high business deduction individuals will feel a bit of a pinch as some deductions have disappeared in lieu of the higher standard deduction. Thus analysts like or decry the plan based on the typical structure of certain deduction strategies that have been popular in the past.
The plan, in general, has spurred a massive wave of corporate and consumer confidence. Many corporations are announcing plans to share the wealth with bonuses, new employee programs, and charitable giving. Despite doomsayers like Chuck Schumer decrying the unfair “benefits for the rich” and claiming that corporations are generally greedy, ne’er-do-wells that won’t help anyone, the fact is that the more money that stays in the private sector the better. And the confidence less burdensome taxes bring plays a large part in economic health. But all is not rosy in the land of the “Trump Bump” economy.
There are a lot of economic bubbles that have been building (or in some cases re-building) since the devastating recession of 2008. These bubbles have been gaining pressure well before Trump ever considered a political career. Obama’s economic policies were a disaster. Bush’s policies before him were not exactly the results of a financial savant. And a number of those simmering disasters still loom on the horizon and may yet unfold despite the best efforts of current political leadership.
For example, the housing bubble is right back to its pre-2008 enthusiastic optimism, with almost as many demographic and credit issues lurking under the surface. We do not feel it here in Utah, where speculative enthusiasm in real estate reigns. But keep in mind, the State of Utah is the only place in the entire western world with a replacement rate above 2.0, hovering near 3.8 at present. Around the rest of the U.S, demand for housing is actually declining with each passing year, as there are only 1.7 people to buy a house for every two people that pass away. This bubble will burst elsewhere, just like in 2008, and the subsequent meltdown in credit markets will bring it here with rapidity.
Consumer loans, such as car loans, credit card debt and student loans, are in a huge bubble that is already starting to deflate. Bitcoin and other cryptocurrencies are in a bubble, and threatening central banking money supplies and utility as consumers speculate and sidestep the fiat dollar. The national debt is nearing meltdown, and without any talk of deficit reduction and budget balancing with the new tax plan, additional deficits could easily sink the ship.
There are troubled bond markets, serious issues with raising interest rates (which are necessary for a recovering economy) and the king daddy of all bubbles…the derivative bubble. An event as elementary as having international bankers make calls on a minor percentage of outstanding derivatives would send global financial markets into a panic.
International pressures on the dollar abound as Iran, China, Russia, Venezuela and others trade oil for gold and attempt to circumvent the petrodollar. Adversarial powers seek to remove the dollar as the world reserve currency which would implode the value of our currency. An outbreak of a major conflict with North Korea or some hot spot in the Middle East like Syria could drain the enthusiasm out of financial markets and consumers alike.
The list of possible economic triggers could go on and on, but the point is obvious. We are headed for a downturn sooner or later, and once the fervor for Trump policies wears off and reality sets in, a severe recession could be around the corner. Conservative economists like Jim Rogers or Peter Schiff will sound the alarm all day log on some of these eventualities. And when that day comes, and it always comes, the left will now have their premier gotcha moment. All fingers will point and all vitriol be unleashed on the Trump Tax Reform and the Republicans who supported it when the next recession arrives.
Schumer set the table when he declared “Republicans will rue the day they signed this bill”. He knows the economy is weak under the surface. He knows that with this bill he, fellow Democrats and an ever complicit press will have their new scapegoat. Eight years of gross mismanagement under Obama are now off the hook. Trump and the Republican majority Congress will get the blame, deserved or not. And the fact is, without some serious budgetary dieting, they may deserve at least some of the blame. But the foundations for the next recession were in motion long before the whirlwind known as President Trump came on the scene. And that is a fact we should all be cognizant of and be prepared for.