Tax Overhaul or Economic Recklessness?
As the Trump Administration celebrates its legislative victory of “sweeping tax reform” (most notably the reduction of corporate tax rates), there is reason to wary of the economics underpinning the new tax plan. The assumptions as set forth by the administration’s economic advisors, such as Treasury Secretary Steve Mnuchin, depend in part on corporate growth projections and the belief that the tax breaks at the top will trickle down to middle class wage earners.
Mixed Peer Reviews
Economists have not been universal in their praise of the new bill. While different versions were circulating in the House of Representatives and the Senate, The University of Chicago’s Booth School of Business compiled feedback from their Initiative on Global Markets (IGM), and the results are a stark contrast to the rosy outlook pitched by the administration and members of the GOP:
China Rethinks US Debt
The question of the debt-to-GDP ratio is an important one. If corporate growth rates don’t meet the expectation, we could see a dramatic rise in the level of the national debt, which is currently at approximately $20 trillion. Of that $20 trillion, approximately $6.3 trillion is held by foreign countries with China holding nearly 20% of this foreign-held debt. Why does this matter? The US is reliant on this foreign investment in order to cover any shortfall between tax revenue raised and government expenditure. Recently, China expressed a cautionary warning that they may purchase less US debt. Such a change could have serious ramifications, including an increase in interest rates and a slowing of economic growth. This, in turn, would likely impact those corporate growth assumptions about which Mnuchin is so confident.
Sound the Alarm?
While the medium/long-term impacts of the new tax bill are uncertain and potentially worrying, there is no cause for panic. Changes in fiscal policy are part of the economic cycle and help maintain equilibrium in global markets. We have seen the US enjoy a sustained 9-year bull run since the recovery from the Global Financial Crisis began in 2009. It will not be surprising if US equities experience a correction or if the level of the national debt is a factor in such a correction. Such volatility is normal and helps to underscore why we adopt a globally-diversified asset mix in our strategies.