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Bansi Sharma @bansisharma
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1. MSM Is Outraged That Economy Is Soaring
That is the only conclusion one can draw from the headlines being cleverly (mis)assigned to a Moody's 10 year projection on the economy in the form of govt revenues and expenditures. Have a good look at this graph and let me explain.
2. This is a very instructive graph. I take no issue with the graph because it is based on facts from the past and projection into the future is based on debatable but reasonable assumptions.
3. My issue is entirely with the horrendous interpretations that are being heaped upon this graph by MSM to make egregiously partisan points which bear no resemblance whatsoever to the reality reflected/projected in the graph.
4. Here's the Yahoo News shoddy and despicable headline:

"The Trump tax cuts are putting America in a hole"

The senior columnist Rick Newman should be ashamed of himself for this witchcraft. File this atrocious headline away, and allow me to explain what the graph truly says.
5. First, a very important lesson which MSM economists will never mention, whether they know it or not. The revenue to GDP ratio over any length of time (graph covers 50 years) fluctuates but always reverts to the mean of around 17%, give or take.
6. I have looked at tax revenue data for even longer than 50 years and the same holds. This is such an important point that I want to dwell on it. I want every man, woman, and child in the country to know this in their mind and in their gut.
7. This is the single most important macroeconomic fact you must know. It will help you clearly see through the mountains of deception that you will see, hear, or read about throughout your life, a lot of it even from Nobel laureates like Paul Krugman who are partisan hacks.
8. So let me repeat the most important macroeconomic fact: "Federal tax revenue as a percentage of GDP in the U.S. never changes much, no matter what the tax rates." It has hovered around 17% over time periods which have seen marginal tax rates as high as 90% and as low as 20%.
9. But tax rates sure do affect the economy and hence the total size of the GDP. So if the ratio of tax revenue to GDP stays fairly constant, what happens to tax revenues. Excruciatingly simple math. Tax revenues go up when GDP goes up and tax revenues go down when GDP goes down.
10. While politicians spend all their time talking up or talking down tax rates to indulge in all manner of class warfare, the reality is govt tax revenue, except during very short time frames, has very little to do with tax rates.
11. The economy readjusts pretty quickly to foil any changes in tax rates. The only way to actually increase the tax revenue, I repeat THE ONLY SUSTAINABLE WAY TO INCREASE TAX REVENUE, is to grow the economy, i.e. increase the GDP.
12. Hence, tax rates do matter, but not because of their numerical value, but because of how they are structured; not because of how good or bad the marginal tax rate looks on paper or sounds in political soundbites, but how good or bad an impact the tax code has on the GDP.
13. Regardless of numerical values in the tax rate table, a tax code that stimulates the economy sustainably is good, and a tax code that puts a damper on the economy is bad. So don't look at the numerical rates, look at whether a tax code change increases or decreases the GDP.
14. So coming back to the Trump Tax Reform. Of course the year corporate tax rate drops from 35% to 20%, the corporate tax revenue will go down. That is a predetermined mathematical certainty, within reason. There is no news there. That is what was expected in the short run.
15. The only question is whether the tax reform stimulated and grew the economy. There's no doubt it did, and continues to do so. As the GDP grows, so do the tax revenues, even with lower rates. Tax revenues are going up and will continue to do so year after year due to tax cuts.
16. However, what will not change that much is the ratio of tax revenue to GDP. Revenue will go up, GDP will go up, and the ratio will hover around 17%. Period.
17. So how come the federal deficit is projected to grow in the Moody's graph. Because of the math. Federal deficit is the difference between govt expenditure and govt revenue. Even though revenue is going up, the expenditure is going up even more, and hence the deficit grows.
18. Tax Reform reduced tax rates and stimulated the economy, but it did absolutely nothing regarding govt expenditures. Growing the revenue cannot by itself reduce the federal deficit, if the expenditures keep outstripping any growth in revenue.
19. Trump has delivered economic growth. Now Trump and Congress must work on reducing spending. Will they? Unlikely. So put the blame where it belongs, if you are concerned with deficits. Trump is not and will not be blameless in this regard.
20. If deficits grow, blame both Trump and the Congress for not cutting spending to reduce the deficits. Don't blame Trump for the tax reform which is delivering national prosperity.
21. There is another ironic twist in delivering economic prosperity. As the economy heats up, Federal Reserve raises interest rates. Higher interest rates increase govt expenditure on interest payments on the monumental debt already amassed, which increases the federal deficit.
22. One of the primary drivers for the deficit growth in Moody's graph is the interest expense that is supposed to go up because of higher interest rates enabled by economic growth delivered by Trump's tax reform.
23. Yeah, we can reverse the cycle by increasing taxes and thereby tanking the economy which will force the Fed to reduce interest rates and hence govt interest expense. Is that what we want to do? We can reduce mortgage expense by moving to a smaller house.
24. Nationally, it is far better to increase income and manage the expense down so we can afford to pay down the mortgage quicker. Trump tax reform delivered income growth. Now we need to manage expenses down.
25. Now look back at that horrendous Yahoo headline. In essence, it blames Trump for delivering higher national income because that leads to drunken Congress spending even more, and the Fed raising interest rates, and thereby increasing our debt. Fine logic there guys!

The End
And That's How Deficits Happen
Through the first two months of this budget year, revenues total $458.7 billion, 3.4 percent higher than the same period a year ago. Expenditures totaled $764 billion, up 18.4 percent from the same period a year ago.
Notice, tax revenues went up!
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