Trump’s tax cut is plutocracy at work

Posted on

Trump has delivered his tax plan. The Guardian has done a good summary of its superficial impact. And it is true that for most Americans this will offer a tax cut, even if for many that will be because of the considerable and economically unjustified increase in the standard deductions available to offset income, which amounts in UK terms to a massive hike in the personal allowance.

That said, it is apparent that large corporate and wealthy America will be celebrating most. That is inevitable. They pay more tax than small corporate entities and middle income people in the US. And the cuts were always intended to be heavily biased their way.

Will this stop US company offshore tax abuse? It is hard to say: I am not pretending I know the detail as yet. I suspect not though.

Will it stimulate growth? On that we can be clearer. The answer is not a lot. Corporate and wealthy USA does not spend enough to make a difference. They hoard. Their wealth piles will grow. That of most in the USA will not. And an increase in stacked wealth is not the same as an increase in real disposable income.

Perhaps more importantly, if the USA is a meaningful concept (and under Trump you wonder) there is another issue to consider, and that is the impact on the finances of the US government.

I am well aware that I argue that tax is not required to fund government spending. I also argue that it is not necessary for a government to balance its books. And it is factually true that a government that issues its debt in its own currency can never go bust because it can always print the money required to make any settlement. But these three facts co-exist with an obligation on a government to offer a credible fiscal policy, most especially when the impact of monetary policy is uncertain (as I would argue it still is in the US) and when there is no other means to control inflation.

What inflation is at risk? It won't be US wage inflation. Of that you can be sure.

Nor, because this money will not trickle down, is overall price inflation in the US much at risk.

But asset prices are. US stocks are already at record high levels. This will get worse. Three consequences follow.

First, this is a price paid by those forced to save for their retirement. They will be overpaying for the assets that they acquire for this purpose and the consequence will, inevitably, be that their actual eventual pension will be reduced as a result, because these assets will not realise the sum paid for them because they will currently be overinflated in price. That means the cost of retirement just grew.

Second, if this asset price inflation spills over into commodity prices, and I think it will, then the US will be exporting this inflation to the rest of the world, with consequences for us all.

Third, let's talk National Security, as Trump has been. The US dollar is the reserve currency of the world, but that could be in jeopardy if Trump shows himself to be completely indifferent to the quantity of dollars that he injects into the worldwide economy, which underpin world trade. He has to accept that in doing so he may put China at a competitive advantage. And that too has massive consequences for stability and inflation as the world adjusts.

The Democrats were right to call this tax cut reckless. It is. It is plutocracy at work. It should (but probably won't) alienate Trump's support. And it will cause economic harm within and beyond the USA. All that is obvious and predictable. Which makes it even more worrying.