Both political parties are gambling on the recently passed GOP federal tax reform bill. The term in poker is “all in.” They are all in. Republicans, of course, gamble that the lower rates will spur investment — and will fire-up consumer spending. They bet the economy will experience a rising tide. And this rising tide […]
Both political parties are gambling on the recently passed GOP federal tax reform bill. The term in poker is “all in.” They are all in.
Republicans, of course, gamble that the lower rates will spur investment — and will fire-up consumer spending. They bet the economy will experience a rising tide. And this rising tide will lift all boats.
This is not a bad bet. Similar tax reforms have lifted economies off their sickbeds around the world. Similar tax cuts under President Reagan hoisted our own economy from a morass. The so-called Kennedy tax cuts (they arrived after his death) rejuvenated our economy. Tax cuts of nearly 100 years ago were famous for doing the same.
Apart from the history, there is a logic to cuts in tax rates. After all, such cuts simply leave more money in the hands of the people. Cuts leave less money in the hands of their government.
If they are confident, the people will spend that additional money. And invest it. Both of which help the economy expand. An expanded economy then throws off more money for government. And everybody is happy.
This logic extends to business. Lower tax rates for businesses leave them with more money. If they are confident, they will use the extra money to invest in expansion.
The cuts also help to lower the cost of capital. Obviously, businesses use capital to expand.
If businesses feel comfortable and optimistic, they are more likely to make use of that lower-cost capital. They will invest it into new businesses, new markets, etc. In other words, they are more likely to expand. Which means they are more likely to add jobs. The economy gets a rising tide. And everybody is happy.
Such is the bet of the supporters of the tax reform. For instance, the reform lets companies pay much lower taxes on trillions of overseas profits. If only they will bring them back to the U.S. The gamble is twofold: Companies will indeed bring money back. And they will then use it to expand.
Meanwhile, Democrats went all in as well. They unanimously opposed the tax cuts in both houses of Congress.
They despised the tax cuts — called them horrendous. They warned that children will go to bed hungry. Oldies will die more quickly. And all that. They predict government will be starved of money from the tax-rate cuts. When starved of money, government will have to plunge into debt. Well, further into debt. The Obama attempts to rescue the economy broke all records for debt.
Democrats have refused to be part of the tax reform. They have instead proclaimed the reforms are akin to the plague.
They could have participated. They could have negotiated with Republicans. In return for their votes, they could have won various concessions. They chose not to do that. They chose to leave no fingerprints on this reform.
This is a big gamble. If the reforms work and the economy hums, the Democrats will look bad. If they work, Republicans will crow, and Democrats will eat crow.
Ah, but what if the reforms don’t work? What if we suffer a recession? Or stagflation? Or the stock market crashes? Democrats will crow that they had nothing to do with the mess. It will be the Republicans who eat crow.
Either scenario is possible, of course. There have been times when capital has been dirt cheap and profits plenty. But businesses have failed to use the capital and profits to expand. Because they had no confidence. Instead, they sat on the money. Or paid out the profits in dividends, or used them to buy back their own stock.
There have been times when consumers did not spend. Even though they had the money. They held back because they had no confidence.
In other words, the big tax reform could fail to stimulate. Just as it could be a rousing success.
What is interesting to me is that neither side is hedging its bets. Each party is all in on this bet.
Always interesting, isn’t it?
From Tom…as in Morgan.
Tom Morgan writes about political, financial, and other subjects from his home near Oneonta. Write to Tom at tomasinmorgan@yahoo.com. You can read more of his writing at tomasinmorgan.com