Tuesday, August 29, 2017

The Goldman Sachs Bankers Selling Trump's Tax Overhaul

Not too long ago, Wall Street bankers were worried about federal budget deficits and the growing level of government debt.  The world was going to come to an end unless the government cut entitlement spending and took actions to reduce the debt to GDP ratio.  That tune has predictably changed with Trump in the White House. 

Donald Trump needs a legislative victory and he has a Republican Congress.  Republicans worry a lot about budget deficits when a Democrat is in the White House.  They seem to worry less about budget deficits when a Republican is in the White House.  The bankers heading up Trump's tax overhaul team, which they call tax reform to give it a positive spin,  have been working with Congress to make steep cuts to corporate taxes among others.  The problem with tax cuts is that they reduce federal tax revenue.  That forces the government to cut spending to avoid budget deficits which increase the debt to GDP ratio.  The process then becomes difficult for a variety of reasons.  One way to pay for the tax cuts is to eliminate some of the deductions that are used to reduce taxable income.  As one might imagine that becomes a questions of  "whose ox do you want to gore".  The other way is to reduce spending but we have a president who wants to increase military spending  and build a $20 billion wall between the US and Mexico.  Its also the case that tax cuts and budget deficits tend increase the economic growth rate.  Consumers have more money to spend and the government is borrowing in order to increase its spending.

The other problem with budget deficits, and the expansion of government debt,  is that Senate Democrats can use the filibuster to block a tax bill if it increases the level of government debt over a ten year period.  In order to pass a tax bill with a simple majority, without the threat of a filibuster,  the tax bill must avoid an increase in government debt at the end of ten years.  That means that some the tax cuts must be temporary or some magic must used to argue that the tax cuts will expand the economy enough to compensate for lower tax rates.  Consequently, a difficult process becomes even more difficult.  This would be fun to watch if it were not so serious.  Government is essentially about how much the government raises from taxes and where it comes from.  It is also about what the government spends it money on.

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