Federal Reserve member thinks we could be in for collateral damage from new tax cut

In an article written by Jonathan Spicer and Chizu Nomiyama (Reuters), they indicate that one of the Federal Reserve’s most influential members offered a point-by-point critique of U.S. President Donald Trump’s sweeping tax cuts. He warned that the move could put the country on an unsustainable fiscal path that will imperil the economy’s stability in the future.  I agree with him, and congress has not listened to reason from people who know the critical balance between tax law and budget spending.  How can we cut the tax flow by 1.4 trillion and avoid a short-fall in the budget by an equal amount?  Well, the president says the new tax trimming will bring more spending money from newly hired employees who have been hired because of the money saved    for businesses by the new tax reduction.  Yeah, I am a white rabbit and I live in Alice’s tree.  New York Fed President William Dudley, who was a key architect of the U.S. central bank’s decade-long response to the financial crisis, said the new cuts to corporate and individual taxes will provide a short-term boost but leave the economy more vulnerable in the years to come. Not only could the bill eventually hurt U.S. creditworthiness, it is unlikely to bring about spending since corporations and the rich benefit the most. A conclusion the president owns. Dudley made a “strong case” for the Fed to keep gradually raising interest rates, which usually promotes investment and takes spendable cash out of the market.  Blaming the political parties for a bad decision does not negate its effects and some of the effects will be delayed.  Therefore, when we realize the problem exists, it could be too late to take alternate measures.

I can not deny that the economy is improving.  The stock market is advancing and other key elements of the economy are gaining and are prosperous.  But, in the long run, the negative factors will more than off-set the temporary gains. In the words of Colonel Martin (Business Teacher at Lipscomb University) “there is no free lunch.”

The law was ramroded into law and is considered a significant accomplishment attributable to the president.  Take note, best intentions often sour when adverse positions encroach.  You may be able to detect that I am not easily swayed by future promises or delayed results.  Corporate income tax rates are to be reduced by 14 percent and individual rates, reduced for households, will create more disposable cash flow.  Well let’s wait and see.  Janet Yellen, Secretary of the Treasury, is talking about increasing the interest rates and that will absorb much of any cash provided by the new tax cuts.

If full employment is actually attained (it is not really full employment is just a low unemployment rate of 3%) and with business and household disposable income on the rise, there may be a short-term rally, but long term the economy tends to correct its self and we are back at square one. If the budget deficit becomes 1.5 trillion higher, Dudley, a permanent voting member on the Fed’s monetary policy committee said record-breaking financial markets appear unconcerned that “the current fiscal path is unsustainable”. That means private investment could be crowded out, possibly eclipsing benefits from capital spending and potential output.  Corporations and higher-income Americans will be less inclined to spend, suggesting “a significant portion of the tax cuts will be saved not spent”. “Over the longer term I am considerably more cautious about the economic outlook”, said Dudley.  I just hope the knee-jerk reactions do not become long-term problems.  Who knows, it could work, but I have my doubts.  How about you?

For more information, call Wilson & Wilson, PC, CPA, CFE at 615-673-1330   or  email  jim@ wilsonandwilsoncpa.com