Thoughts About Tax Cuts, The Federal Deficit, Virginia’s Politics, And Social Media

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By: Kent Engelke | Capitol Securities

Perhaps one of the biggest elephants in the room that is not discussed is the federal deficit. In my view, the issue at hand is spending not revenues.  Generally speaking, spending is increasing at a rate two times greater than revenues. Tax revenues are at an all-time record and are expected to continue to increase. All must remember in government speak; a spending cut is a reduction in the rate of growth not an outright cut in spending.

Many are proclaiming the 2017 tax cuts as the reason for the incessant rise in the deficit to over $22 trillion. Last week the CBO suggested otherwise.

The CBO released a 10-year forecast — the first to assess the effects of tax reform after one year of hard results. Compared with its pre-reform projection, the CBO now expects annual GDP growth to be almost $750 billion higher by 2027, stating a strong case that the reason for this rise is tax reform.

The CBO further states the cuts will add $1.9 trillion of additional debt in the coming years and the government will pay about $60 billion more in interest each year as a result.

So the bottom line according to the WSJ is that an additional $60 billion a year buys an additional $750 in annual GDP.

According to the CBO, tax reform increases real inflation-adjusted GDP by $300 to $450 billion a year in the coming decade relative to the CBO’s preform projections.

Simplistically speaking, a tax cut teaches a person to fish versus giving a person a fish to eat. They increase the amount of money available in the private sector, the segment of the economy that has the most efficient use of capital.

There are some in government demanding higher taxes to pay for yet even more social spending, advocating the proverbial cradle to grave mentality.  The simple fact of the matter is that greater government spending and taxes lowers GDP and increases income inequality, the inverse of which some are proclaiming.

Increased government spending sounds great on paper but it does not work. All make comments about the efficiencies of the Post Office and the DMV. Can one imagine the economic efficiency of a more centralized government running parts of the economy?

Spending is sexier and politically appealing than tax cuts. However, tax cuts create lasting growth, wealth and revenues, equivalent to eating vegetables versus sugar for long-lasting energy.

It is because of the tax cuts, as well as the increasing labor participation rate and rising home values in secondary and tertiary cities that I believe growth will continue to exceed on the upside as money continues to gravitate back to Main Street from Wall Street.

Radically changing topics, one cannot make up the political events of Virginia. Yesterday, the state’s attorney general admitted that he too dressed up as a “blackface” almost forty years ago. To remind all, several days ago he adamantly called for the resignation of the governor for a similar event. 

Moreover, the alleged sexual assault perpetrated by the state’s lieutenant governor became even more credible with the victim’s name and lurid details of what had supposedly happened.

All three were regarded as rising Democratic leaders.

What does this have to do with the markets? The political environment is extremely toxic where any allegation, regardless of possible merit or year that such occurred and it is greatly impacting leadership. 

I have always regarded social media as evil. I do find it ironic that Amazon’s Bezos is blaming the hackers for the release of his texts that luridly describe his infidelities, a hack that will probably cost him $100 billion. Publically, he has not taken responsibility for his actions, claiming he is a victim, a victim of privacy violations that caused the most expensive divorce in history.

The social media giants proclaim all information is safe and will not be used against you.  I guess Bezos has discovered otherwise.

Society is imploding under the “I am more righteous than thou” attitude where many become greatly slighted at any real or imagined grievance, grievances perpetuated by social media and the unedited blogosphere.

The potential impact of today’s victim-based environment is infinite and perhaps astronomical where markets will be affected.

Enough of the rant, markets were quietly mixed as equities are flirting with the pivotal 200-day moving average.

Last night the foreign markets were down. London was down 0.28%,  Paris was down 0.69% and Frankfurt was down 1.34%. China and Hang Sang closed for a holiday and Japan was down 0.59%.

The Dow should open moderately lower on growth and trade concerns. The 10-year is up 7/32 to yield 2.68%.

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