The Finance Committee of the US Senate approved the tax proposals while voting within the Republican party lines. Republicans approving the proposal of Republic President is no big deal, but such move means that the entire Senate can vote on Tax cut proposal as early as tomorrow.
Given the Republican-Democratic party distribution of power in Senate of 52-48, it is likely to be a close vote. Republican can afford to lose only two party votes and if this happens, the Vice President will be casting the tie-breaking vote. If the legislation passes the Senate, the next step, which could begin next week, is to reconcile the House and Senate version. They are several important differences between the House and the Senate version, but it is generally seen as a deal is done version, even if the precise details are not known yet.
While the tax-cutting plan is controversial in terms of economic effects, it can actually result in monetary tightening.
The economics of tax cut proposal
Let’s face it, the economics of Trump’s tax cut proposals stand on very shaky grounds. Most economists think it is unfunded and poses threat to the US economy long-term, as in increases debt enormously.
The problem with the US tax cut proposal is, that it creates a huge, $1.5 trillion hole in the US budget revenue over the course of next decade while the US government needs more revenue because of millions of Americans retiring every year claiming Social Security and Medicare benefits.
While in 2017 45 million Americans receive Social Security retirement checks, by 2027 the number of American claiming the benefit will rise to 60 million.
Over the next decade, the average American family will get a tax cut of $3,550 while the US debt would grow by $4,644 per person or about $18,500 for a family of four persons. That adds up to the Federal debt that stands at 106.1% of the US GDP at the end of 2016 and the fact that the US Federal government is facing a debt ceiling problem that needs to be addressed soon.
How to do it
Some Republican and Democratic Senators acknowledge the debt problem and propose some automatic tax increases should the projected revenues plan fall short of expectations. In terms of money, the plan of raising taxes automatically by 1% after realizing in 5-years that there is not enough of the revenue, this is barely patching the leak. But it looks like this is the price to pay for Republicans to give it a go.
Tax cuts and monetary policy
The US economy is moving full steam ahead with the third quarter GDP growth reaching stunning 3.2% annualized growth rate and the employment reaching full capacity. The New York Fed President William Dudley as well as Federal Reserve Bank Governor and its future Chairman Jerome Powell said that the US economy is running at “full employment” and at current stage does not need any fiscal stimulus. Although the Federal Reserve does not have its say on taxes in the US, their opinions matter for the political elite as well as general public.
Actually, should tax cut legislation come into force, one of the ways how to avoid overheating of the economy is to introduce the tighter monetary policy. So, in fact, we might see abrupt swing from ultra-easy policy of near-zero interest rates to monetary tightening with interest rates above equilibrium rate of 2.5%-3.0%
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