A major concern of mine (there are
so many) is that the adoption of a draconian tax reform right now, along the lines Trump has proposed (and Congress is likely to adopt) will almost certainly guarantee a world-wide recession, like Bush's tax program did - only, given the fragility of the recovery, much, much worse. I can be VERY specific:
DeLong-Summers condition
J. Bradford DeLong and Lawrence Summers explained why an expasionary fiscal policy is effective in reducing a government's future debt burden, pointing out that the policy has a positive impact on its future productivity level. They pointed out that when an economy is depressed and its nominal interest rate is near zero, the real interest rate charged to firms is linked to the output .... This means that the rate decreases as the real GDP increases, and the actual fiscal multiplier μ is higher than that in normal times; a fiscal stimulus is more effective for the case where the interest rates are at the zero bound. As the economy is boosted by government spending, the increased output yields higher tax revenue[.] Also we need to take account of the economy's long-run growth rate g, as a steady economic growth rate may reduce its debt-to-GDP ratio. And then we can see that an expansionary fiscal policy is self-financing[.]
- Austerity. I left out the formulas as I could not reproduce them here, but they work.
What it really means is this: cutting revenues now, when interest rates are near zero, will cripple the government's ability to respond to any economic shocks, and austerity measures will create a recessionary spiral - such as occurred in Europe (think of Greece). Our current unemployment rate averages less than 5%. A precipitous tax cut will almost guarantee it will double before the next election.
