I recently explained how in a fiat money system government deficits can be necessary to avoid an undesirable shortfall in private sector saving, which in turn can lead to reduced consumption, which in turn can lead to a collapse in corporate profits, production, and ultimately employment:
Given that under a fiat regime the domestic private sector of any country has an inherent demand for net private savings, and given that under such a regime the government is by law the only supplier (monopoly supplier) of such net private savings, it is important to keep in mind that making a “balanced budget” your domestic policy objective runs the risk of depriving the private sector of that which it demands. If all governments in the world were to run “balanced budgets” there would in fact be no way at all to accommodate any territory’s private sector demand for net savings on top of making the required tax payments.
For people like myself who prefer to have the government off our backs, tax cuts would of course be the fastest way to achieve this objective, given that there’s no realistic chance that anyone would abolish the fiat money system any time soon.
According to Americans for Tax Reform’s analysis of Trump’s tax plan, Trump’s plan provides for a massive income tax cut for wage earners down to brackets of 0%, 10%, 20%, and 25% where the zero bracket applies to incomes up to $25,000. (The current top rate is 39.6%!) It furthermore provides for cuts to taxes on capital gains and dividends and, and a sweeping cut in the corporate tax from as high as 39.6% down to 15%, and abolishes the alternative minimum tax and the death tax.
It is claimed that these cuts will be revenue neutral under what they call “dynamic analysis”, but the New York Times recently pointed out that Trump indicated in phone interview that bigger deficits may initially be necessary:
Mr. Trump himself said in a telephone interview last week that he believed more borrowing and spending would help lift economic growth, a departure from traditional Republican economics.
“It’s called priming the pump,” Mr. Trump said. “Sometimes you have to do that a little bit to get things going. We have no choice — otherwise, we are going to die on the vine.”
He added: “The economy would be crushed under Hillary. But no matter who it is, the debt is going up.”
This stance, coupled with a commitment to massive tax cuts may be an indication that Trump’s fiscal stance is in line with supplying the public the private sector saving needed to allow for a return to stronger growth than what we’ve been seeing over the past decade. Only time will tell.
Even Bernie Sanders’ economic advisor and Modern Monetary Theory proponent Stephanie Kelton tweeted in regards to Trump’s statement:
Who ever said we can’t all get along some day? 🙂
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