Is Another Tax Cut Possible?
Author: Greg Valliere
August 19, 2019
REGULAR READERS KNOW we’ve been predicting that the Trump Administration may propose another tax cut — and sure enough, economic adviser Larry Kudlow disclosed yesterday that “we’re looking at it.”
GRASPING AT STRAWS: The White House seemingly succumbed to the recession hysteria last week, as jitters rose about a slowdown. We don’t think a recession is imminent; the Atlanta Fed’s “GDP Now” indicator is predicting a 2.2% growth rate in the third quarter, consumers are spending strongly, and unemployment is at 3.7%.
BUT THE CHINA TRADE WAR is taking a toll on business confidence and investment, and President Trump said yesterday that he’s not ready for a deal with Beijing — which raises the threat of softening economic growth in the U.S., far below the pace Trump wants heading into his re-election bid. So all options are on the table, including a tax cut.
TRUMP PROPOSED A 10% ACROSS-THE-BOARD TAX CUT last October, in an unsuccessful effort to boost Republicans in the fall election, and he may propose one again. For it to have any chance of enactment in the House, it would have to be targeted exclusively at the middle class — and even then, we would anticipate fierce resistance from Nancy Pelosi and her troops; they would demand tax hikes on business and the rich, a non-starter for most Republicans.
BUT TRUMP WOULD EXPLOIT the following narrative: The Republicans are the party of lower taxes, while the Democrats want to raise taxes; Pelosi is denying extra income for the middle class. Trump also could include a scale-back of the hated changes to state and local taxes and the mortgage tax break.
DOES TRUMP HAVE OTHER STIMULUS OPTIONS? He could push aggressively for infrastructure spending, which — if enacted by year-end — could add a couple tenths of a percent to GDP by the third quarter of next year. He’s reportedly looking at some type of rebate to consumers to compensate for higher tariffs. He and business leaders will push hard for ratification in the next few weeks of the U.S.-Mexico-Canada trade pact.
AND TRUMP WILL HAMMER AWAY at an old standby — bashing Jerome Powell, hinting that he could demote the beleaguered Fed Chairman. Powell doesn’t doesn’t seem likely to telegraph a 50 basis point rate cut when he speaks in Jackson Hole on Friday morning, still another reason for Trump to rip the Fed. A mere 25 basis point cut next month will not be sufficient for the Commander in Chief.
THE STIMULUS CUPBOARD LOOKS PRETTY BARE: There’s only one credible option if Trump wants stronger economic growth: end the China trade war and curb the pit bull, Peter Navarro. But that’s not imminent, and as long as uncertainty prevails on global trade, Trump will have to live with jittery markets and mediocre economic growth — maybe not a recession, but not what Trump needs to insure re-election.
HIS ONLY OTHER OPTION may be to scare investors that a Democratic president will prompt everyone’s 401(k) accounts to “go down the tubes,” as he asserted last week. Not exactly subtle, but this won’t be a subtle election.
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