Trump’s Tax Plan Risks Pushing Excessive National Debt to Unsustainable Level
Donald Trump presented his tax reform plan on September 27. The president is promising a radical tax plan in the finest Ronald Reagan tradition. It’s the promise that can take much of the credit for the euphoric market on Wall Street. But the tax plan is also going to fuel the U.S. debt crisis because it does little to resolve national debt. (Source: “Details of GOP tax reform framework revealed,” CNN, September 27, 2017.)
Trump waited a long time before revealing the details of his tax proposal. Perhaps because the president may not have all the details; he may even be guilty of having unclear ideas on the matter. But, reform or not, there is an obvious detail that the president has missed. The benefits for the middle and lower classes are questionable, even as the tax plan could push debt to a point of no return.
Then there’s the question of getting Congress to approve this ambitious tax plan. There are many unknowns, starting with the biggie: financing. Financing such a tax shift is no amateur job. For starters, the difficulty of finding the funds for the tax cuts explains why Trump has been so keen to scrap Obamacare. Indeed, he has not succeeded after three attempts. That’s just the appetizer.
But debt seems to be the issue that Americans, from the president down, simply don’t want to discuss. It’s staring everybody in the face, but nobody has the guts to confront the debt crisis. Perhaps that’s because both rising national debt and household debt have been the main pillars supporting economic growth since the financial crisis of 2008.
Have We Learned Anything from the 2008 Financial Crisis?
It raises the question: have we ever actually left the financial crisis behind? Sure, stocks have recovered in a spectacular manner. But risk has been “artificially” absorbed by impossibly low nominal interest rates. These have exacerbated both debt and the risk of a medium-term financial crisis. Household debt has continued to grow over the past decade, despite the economic “recovery.”
Household debt has continued to grow over the past decade, despite the economic “recovery.” Debt, spun more favorably as access to credit, can doubtless contribute to demand. The availability of credit is crucial to growth. But we’ve had too much of it. This has driven unprecedented levels of indebtedness, resulting in financial imbalance if not outright misrepresentation.
But household debt eventually catches up to the efforts to mask it. It starts weighing on growth and increases the likelihood of a financial and banking crisis. That’s what happened in 2008 after all. The 2008 financial crisis should have made it clear to everyone that a high household debt culminates in a long-lasting recession. Naturally, the bigger the debt levels, the more pronounced the effect. Therefore, nowhere is the effect more pronounced than the United States, where household debt of $13.0-trillion is higher than ever. (Source: “Americans’ Borrowing Hits Another Record. Time To Worry?,” NPR, September 12, 2017.)
Debt has continued to accumulate after the 2008 subprime crash in the United States and beyond. Debt has been a spider web entangling everyone. These include private individuals and businesses alike.
Everyone is not deaf to the song of the sirens. All over the world, the debt ratio of companies is increasing systematically. Especially in the United States. The corporate debt ratio is significantly higher than before the financial crisis. It is no coincidence that businesses in the United States are relying on short-term profits and thinking. They may even have used debt for stock buybacks, simply to push stock prices and dividends higher. (Source: “Debt is fuelling the most stock buybacks since 2001,” The Globe and Mail, August 9, 2016.)
Of course, they’ve only left companies and shareholders more vulnerable.