Some analysts sceptical of long-term impact of US tax cuts on economy

Alexander Bueso WebFG News | 04 Dec, 2017 14:58 - Updated: 14:58 | | |

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The upper chamber of the US Congress approved a tax cut package at the weekend, possibly paving the way for final approval for as soon as the end of this week, but market commentary is quite divided on just how powerful a boost it will deliver to the economy and the price the country will have to pay in terms of an increased debt burden.

On Saturday, Senate Republicans managed to clinch passage of the bill by a margin of 51 to 49.

Furthermore, Republican aides had reportedly said that a reconciliation between the tax reform bills passed in the Senate and in the House of Representatives might be achieved by the end of the same week.

Significantly, analysts at Rabobank argued that a special Senate election in Alabama on 12 December might be helping to focus minds on Capitol Hill, as both the Democratic and Republican contenders for that seat were opposed to the proposed tax reforms.

In any case, just how effective would the tax 'reforms' be in promoting a stronger US economy? "Not very", was the answer from analysts at the Dutch broker.

According to Rabobank, the tax reforms then under discussion would only result in a further misallocation of capital, away from fixed investment and towards financial assets (as had been the case in the past, such as in 2004), which in turn helped to explain low levels of productivity and wage growth in America in the wake of the financial crisis.

"[That] has also resulted in an explosion of wealth inequality as those who are long assets appear wealthier while those who are long income fall further behind," Rabobank added.

Analysts at ING were of a similar view.

Writing to clients on Monday, ING said: "So while the plan is supportive for growth prospects, we are more cautious than politicians in terms of the likely upside it provides. Instead, we see more of a near-term boost for equities (through share buybacks, dividends and wealthier individuals putting more money in) and for Treasury yields as the national debt rises more quickly and markets see greater scope for Federal Reserve interest rate increases.

"Moreover, there are other structural issues, such as Trump's immigration policies that could also provide an offset for growth meaning his loftier ambitions for activity are missed."

To back up their arguments, ING points to analysis of the tax cuts effects conducted by the Tax Policy Centre which suggested a boost to US GDP growth of 0.7 percentage points in 2018, subsequently tailing off to 0.4% in 2021 and 0.1% by 2026.

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