Will Trump’s Tax Cut Plan Lead to a Historic Crash?



President Trump is considering a payroll tax cut plan to boost the US economy. However, is the tax cut really necessary? The Fed started quantitative easing last month. The unemployment rate is near a decade low. Also, inflation isn’t far below the target. The US budget deficit has risen 23.8% on a year-over-year basis. The argument behind the payroll tax cut plan could be that tariff money from Chinese goods will compensate for the tax losses.

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Will the tax cut plan lead to a historic crash?

The tax cut plan could increase consumer spending. However, the plan could also overheat the financial market. In 1929, people borrowed and invested in equities. The easy credit facilities made the “asset bubble” bigger, which led to the historic crash. In dollar terms, since the beginning of the trade war in June 2018, only the S&P 500 Index is in the positive territory among the top five economies’ equity indices.

The other four economies’ equity indices have fallen by double-digits. The Nasdaq 100 (QQQ) has risen 21.1% and outperformed the S&P 500 on a year-to-date basis. QQQ’s trailing 12-month PE ratio is at 24.3x—compared to a 15-year average of 23.2x. The Nasdaq 100 follows large-cap US non-financial stocks. More uncertainties outside the US could increase the valuation.

Are uncertainties rising?

With rising political and economic turmoil, the US financial market could witness large inflows of money. The unrest in Hong Kong and turmoil in Argentina adds fuel to the fire. On Tuesday, Italian Prime Minister Giuseppe Conte resigned. The Italian economy isn’t in good shape. The world’s fifth-largest economy had a similar leadership change last month. Germany, the largest economy in Europe, fell 0.1% last on a sequential basis in the last quarter.

The uncertainties are high for US businesses. Tariffs on Chinese goods could lead to supply disruption and higher input costs. In fact, Barclays already announced an “industrial recession.” Mark Zandi said that the trade war has a negative impact on sectors like manufacturing, transportation, and distribution. The possible tax cut plan doesn’t seem like a solution to these problems.

Instead of a tax cut plan, the Trump administration should concentrate on enhancing the working-age population. The US working-age population could start shrinking in the next few years, which caused the slowdown in Europe.


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