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Focusing On What's Important Amid Huge Distractions

If current laws remain the same, the federal debt will skyrocket to 150% the size of the entire U.S. economy in 2047, according to a new long-term projection released Thursday by the non-partisan Congressional Budget Office.

"The prospect of such large and growing debt poses substantial risks for the nation and presents policymakers with significant challenges," said the CBO analysis. "If current laws generally remained unchanged, federal debt would reach an unprecedented share of Gross Domestic Product (GDP), intensifying pressures on the federal budget, dampening economic growth, limiting the nation's ability to respond to unforeseen events, and increasing the likelihood of a fiscal crisis."

CBO has released long-term projections of the budget periodically for many years, but release of the forecast this past week comes as Congress and President Trump are maneuvering to deliver on a promised cut of federal taxes.

House Speaker Paul Ryan (R-Wisc.) as well as Kevin Brady (R-Tex.), chairman of the House Ways & Means Committee, the leading legislators in drafting new rules lowering corporate and personal income taxes, are both on the record saying they will only support tax reform if it is revenue-neutral. That means the tax cuts would not change the amount of revenue flowing into government coffers. It also means taxes cannot be cut without cutting spending. If the government wants to spend on rebuilding the nation's infrastructure, it means cutting spending on other programs. The CBO report makes any reversal on the revenue-neutral position and deficit spending unlikely, leaving the nation's leaders no easy solutions.

While it is just coincidence that baseball season is starting, House Speaker Paul Ryan has proposed a BAT -- Border Adjustment Tax -- to raise revenue to pay for a tax cut, but the BAT has not been endorsed by Mr. Trump and could be a whiffer.

The BAT would slap a tax on imported goods sold at retailers. That would hit consumers hardest and affect low-income and middle-income individuals disproportionately, making it a rare proposal of a regressive tax.

Not a hit with retailers, WalMart and Target -- a powerful lobby group -- have come out swinging against the BAT. Retailers are likely to pass on the cost of the BAT to consumer with prices hikes of 15% or 20%.

The BAT is widely expected to knock the dollar up by 20% versus major currencies and raise outcries of protectionism.

So, BAT is far from a sure way of financing a tax cut and may never make it past first base.

After President Trump reiterated his promise of a tax break in February, stocks rallied sharply, and the Standard & Poor's 500 has remained about 1.5% off its all-time high reached a month ago. If investors are disappointed by the tax reforms to emerge, stocks could drop. A correction of 10 or even 15% could come at any time.

However, economic data has been stronger than expected for months. Consumers are in the best shape in years and that could propel stocks higher. Long-term investors should not be distracted by near-term uncertainty and are always wise to look beyond the next drop or surge.


This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial advice without consulting a professional about your personal situation.

Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.


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This article was written by a professional financial journalist for McCarthy Asset Management, Inc. and is not intended as legal or investment advice.

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