Since Donald Trump’s election, the markets have been abuzz on the transition from monetary to fiscal stimulus. President Trump has promised tax reform, both personal and corporate, as well as “yuge” fiscal stimulus and a lower overall budget deficit. But how much room does the new administration have to manoeuvre?
President Reagan argued for a tax cut based on high marginal tax rates that dissuaded people to work. But the marginal tax rate was 69% when Reagan took office in 1981. The highest marginal tax rate today is 40%. Between Presidents Reagan and George H. W. Bush the marginal tax tumbled from 69% to a modern low of 28%. Will a drop from today’s 40% make a difference and increase tax receipts? Can President Trump afford to drop the marginal tax rate as low as 30%?
The fiscal deficit during earlier tax cuts started from smaller deficits. With today’s deficit at -3.5% compare that to a +1.9% surplus during President George W. Bush’s tax cut and -2.2% deficit during Reagan’s first tax cut, does President Trump have much wiggle room on a fiscal balance sheet that has yet to recover fully from the global financial crisis? Will the fiscal hawks in the US House of Representatives lower their guard for the sake of party over principles? These are questions that remain unanswered but one aspect is clear: the current US budget context seems more restrictive than any in recent memory.
Karsten Jeske – Mellon Capital, a BNY Mellon company