Tax Deal With Dems Won’t Stimulate Growth – Ep. 284

President Trump Courts Dems on Tax Reform
I think the catalyst for the rise in the stock market today is enthusiasm over President Trump's announcement that he is working with the Democrats and is close to a deal on tax cuts. So that if he can't get something done with the Republicans, he will get it done with the Democrats and, one way or another, he's going to accomplish this major tax reform.
Major Shift to Make Economy More Productive
But of course, it's not going to be tax reform; it's going to be tax cuts. Based on what the President is saying, we're not going to reform the tax code, we're not going to have a major shift that will make the economy more productive. The President has already said that the "rich", however he is going to end up defining rich, and I have  feeling that "rich" might be a lot less income than people might believe, but he is saying that the rich are not getting a tax cut at all. They may even have a tax hike!
Growth Comes When You Lower Marginal Tax Rate
If you're not going to lower the top rate, if you're not going to reduce the marginal rate of tax, you're really not going to get any economic stimulus, because that's where the growth comes from.  Growth comes when you lower the marginal rate and people have the incentive to work harder and product more taxable income, so that maybe the government can actually collect more taxes at a lower rate because there will be more income subject to tax. The reason is, the higher income workers need an incentive to continue to work harder in order to promote savings and investment. if the cost of working harder exceeds the cost of not working, people will choose leisure over productivity.
More Government Spending, Less Revenue
Now if the middle class tax bracket gets reduced a little bit, they probably will not have the incentive to work harder or generate more income or productivity.  They will just pay a little less tax.  I'm all for lower taxes, but only if we shrink government; only if we cut government spending. Nowhere is the President talking about that.  In fact, what he is talking about is more government spending. I'm sure that any deal with the Democrats is going to involve increasing government spending on infrastructure, on hurricane disaster relief, on border security - whatever it is, it is going to be a giant bill that will result in more government spending and less revenue to pay for that spending