Investing in the Trump Era by Nicholas P. Sargen

Author:Nicholas P. Sargen
Language: eng
Format: epub, pdf
ISBN: 9783319760452
Publisher: Springer International Publishing

Impact on the Budget Deficit and Interest Rates

Another issue investors need to consider is the impact that the tax bill will have on the federal budget deficit and interest rates. Following the 2016 elections, it was unclear whether changes in the tax code would be designed to stimulate the economy as President Trump favored, or whether they would be part of broader reforms that would eliminate distortions and broaden the tax base, which House Republican leaders favored. Today, it is evident that a compromise was worked out, in which the net tax cut over the next ten years is targeted to be $1.4 trillion. This increase is considered to be moderate, as it is equivalent to 0.4% of GDP annually and well below estimates of proposals Trump put forth during the presidential campaign.

While the bond market did not respond to the pending legislation, the risk is that bond yields will rise in the future, as the federal budget deficit is expected to rise materially in the coming decade absent any policy changes. With the passage of the GOP tax plan , the deficit could expand by an additional $1 trillion according to the Joint Committee on Taxation beyond what is currently projected by CBO. Consequently, the timing of the tax cut has been called into question, as it occurs when the economy is close to full employment and also when the budget picture is expected to worsen in future years.

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