Why the Tax Cut Boom Will Be Followed by the Tax Cut Bust

Plus, Gary Cohn's warning on Trump's tariffs By Yuval Rosenberg and Michael Rainey US Tax Cuts and Spending Increases Raise Risks to Global Economy, IMF Says The tax cuts and spending increases enacted by the Trump administration and Congress will increase the risks to the U.S. and global economy, the International Monetary Fund said Thursday in an [annual assessment](. The report said that the Republican tax cuts will provide a short-term boost to the economy, but that annual growth will quickly return to its earlier trend, slumping to 1.9 percent in 2020 and 1.4 percent by 2023. “The near-term outlook for the U.S. economy is one of strong growth and job creation,” the report said. “However, despite good near-term prospects, a number of vulnerabilities are being built-up for the medium-term.” The report warned that the new tax cuts and spending hikes will increase the federal budget deficit to more than 4.5 percent of GDP by 2019 — nearly double what it was just three years ago. “The increase in the federal deficit will exacerbate an already unsustainable upward dynamic in the public debt-to-GDP ratio,” the report warned. It added that larger deficits will leave little budgetary room for some “urgently needed” investments, including in infrastructure, that would provide longer-term boosts to growth and help raise living standards. The report also said that the U.S. fiscal stimulus raises the risk of an “inflation surprise” that could force the Federal Reserve to raise interest rates faster than expected, causing volatility and market disruptions — and pain for leveraged households and businesses. The IMF recommended that the U.S. take steps to lower its debt-to-GDP ratio, including: - Reforming Social Security by lifting the cap on the payroll tax, raising the retirement age, indexing benefits to a lower measure of inflation and making the benefit structure more progressive. - “Containing healthcare cost inflation” by using technology to increase efficiency and changing healthcare provider payment mechanisms. - Raising federal revenue by introducing a carbon tax, a federal consumption tax and a higher gas tax. The Treasury Department said it shared the IMF’s positive short-term outlook, but that it differed significantly on the medium- and long-term forecast: “The Treasury Department believes that our policies, including the productivity-boosting mix of tax reform and regulatory relief, will result in more sustainable economic growth.” Trade War Could Erase Tax Cut Boost, Former Trump Economic Adviser Warns President Trump’s former top economic adviser warned Thursday that a developing trade war could wipe out the benefits of the GOP tax cuts. Speaking at an event hosted by The Washington Post, Gary Cohn, who stepped down as the chair of the National Economic Council in April, [said]( that an escalating series of retaliatory tariffs between countries could spark higher inflation and force American consumers to take on more debt, potentially pushing the economy into a slowdown and erasing whatever additional growth the tax cuts are creating. Cohn reportedly resigned from the White House due to his opposition to Trump’s tariff policies. “I have always said the trade deficit doesn't matter. In many respects, it's helpful for our economy,” Cohn said Thursday. And the current saber-rattling by the Trump administration and various trading partners is already having a dampening effect on businesses in the U.S., Cohn [said]( as companies take higher materials costs into consideration in their investment planning. On the tax bill itself, Cohn said that he wasn’t sure if the tax cuts would pay for themselves. “It won’t be revenue-neutral. It may be revenue positive. It may be revenue negative. We don’t know,” he told the Post’s Damian Paletta. Cohn stuck to the White House script on wage growth, saying that the new tax rules would encourage more capital expenditures by businesses, which would result, eventually, in higher wages for American workers: “I am pretty confident that we wrote a tax law that gives companies enormous incentive to build new factories, to hire new people, and to really invest in the U.S. economy.” Are the Trump Tax Cuts Boosting Consumers? Americans have ramped up their spending over the last few months. Retail sales rose 0.8 percent in May, up 5.9 percent from a year ago, and now some economists are forecasting GDP growth near 4 percent in the second quarter, and 3 percent or better for the year. CNBC’s Patti Domm was quick to attribute the spending boost to the tax cuts – “Armed with new-found proceeds from the tax bill, American consumers went shopping in May, driving retail sales — and economic growth — sharply higher,” she [wrote]( – and some bank analysts agreed, with JP Morgan’s chief economist Michael Feroli saying that “consumers wasted no time enjoying their tax windfall.” But other analysts downplayed the effect of the tax cuts, citing instead the steady gains in employment, the arrival of tax refund checks and rising inflation. “You can’t just attribute it all to tax cuts,” Chris Christopher of IHS Markit [told]( MarketWatch. James Pethokoukis of the American Enterprise Institute [pointed out]( that the U.S. has seen dozens of “hypergrowth” quarters of 4 percent or better growth over the last few decades, but there’s little to suggest that the long-term trend of roughly 2 percent growth has changed. The tax cuts may indeed be providing an economic boost right now, Pethokoukis writes, but a new growth trajectory would require more fundamental changes — an artificial intelligence boom or a huge surge in business investment, for example — that would drive productivity significantly higher. Number of the Day: 46.3 Million The Centers for Medicare and Medicaid Services on Tuesday said that [46.3 million]( children were enrolled in Medicaid or the Children’s Health Insurance Program at some point in 2017 — a total that, as The Washington Post’s Philip Bump points out, represents [more than 60 percent]( of the more than 74 million children in the United States. Court Rules That Federal Government Doesn’t Owe Insurers Disputed Obamacare Payments The federal government does not have to pay health insurers money they claimed they are owed under an Obamacare program, a federal appeals court ruled Thursday. In a 2-1 ruling, the panel of judges sided with the Trump administration and rejected claims from two insurers who were seeking hundreds of millions of dollars in Obamacare “risk corridor” payments designed to protect insurers from unexpectedly large losses in the first years of the new law. Under the program, which expired at the end of 2016, insurers with lower-than-expected costs would pay into the system while insurers facing higher-than-expected medical claims would be able to recoup some of their losses. But as the Obamacare marketplaces struggled, relatively few insurers paid into the program while more sought payments. In its first year, the risk corridor program had only enough funds to deliver 12.6 percent of payments owed to insurers, [Politico’s Paul Demko]( notes. The insurers said the federal government was still on the hook for the payments and should tap other funds to cover the shortfall. Congressional Republicans called that an illegal bailout and moved to block such payments in appropriations riders for fiscal 2015 and 2016, prompting the insurers to file suit charging that the government had breached an implied contract. The court didn’t buy that argument. “Congress clearly indicated its intent here,” it ruled Thursday. “It asked [the Government Accountability Office] what funding would be available to make risk corridors payments, and it cut off the sole source of funding identified beyond payments in. It did so in each of the three years of the program’s existence.” The insurers can still appeal the ruling to the full appellate court or petition the Supreme Court to consider the case. Why it matters: At least three dozen other insurers have filed similar lawsuits, according to Politico. “In all, insurers say they’re owed more than $12 billion from the risk corridor program, a shortfall they have partially blamed for skyrocketing premiums and dwindling competition in the Affordable Care Act marketplaces,” Demko writes. At the same time, many of the insurance companies still participating in the federal exchanges are making money, and the legal ruling “shouldn’t affect the market going forward,” said Larry Levitt of the Kaiser Family Foundation. 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It Hasn’t Materialized — Yet.]( – Washington Post - [Trump Administration Undermined Student Debt Relief Unit While Claims Mounted, Watchdog Finds]( – Washington Post - [New York Attorney General Sues Trump and Family Over Charity, Claiming 'Illegal Conduct' for 'More Than a Decade']( – CNBC - [Here’s How That $380 Million in Election Security Funding Is Being Spent]( – Nextgov - [Governor Puts $40 on Germany, Devils in New Jersey’s First Legal Sports Bets]( – Bloomberg Views - [The Republican Tax Bill’s Promises of Higher Wages and More Jobs Haven’t Materialized]( – Philip Bump, Washington Post - [Why Are Americans So Down in This Economy? A Debate]( – Conor Sen and Noah Smith, Bloomberg - [President Trump’s Flip-Flop on Coverage for Preexisting Health Conditions]( – Glenn Kessler and Meg Kelly, Washington Post - [Trump Is Right Not to Defend Obamacare]( – Chance Weldon, Center for the American Future - [Donald Trump's Pre-Existing Condition]( – USA Today Editorial Board - [All of Obamacare Should Be Set Aside]( – Robert Henneke, USA Today - [Obamacare Repeal Rhetoric Remains, But Spirit Might Not]( – Jonathan Bernstein, Bloomberg - [I Was on the CFPB’s Consumer Advisory Board. Until Mulvaney Fired Me]( – Arjan Schütte, American Banker - [What Is Trump Trying to Hide by Blaming Canada? The Answer May Be Frightening]( – Jim Hoagland, Washington Post - [Why I Let Domino’s Fill My City’s Potholes]( – Eric Norenberg, Washington Post Copyright © 2018 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website, thefiscaltimes.com. 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