As I noted last Friday, the recently approved budget was an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

“Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.

While the original House budget balanced on paper and offered some real savings, the Senate’s version accepted today by the House fails to reach balance, enacts a pathetic $1 billion in spending cuts out of a possible $47 trillion, and allows for $1.5 trillion to be added to the national debt.

Make no mistake – this is a defining moment for the Republican party. After years of passing balanced budgets and calling for fiscal responsibility, the GOP is now on-the-record as supporting trillions in new debt for the sake of tax cuts over tax reform and failing to act on the pressing need to reform our largest entitlement programs.”

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.

As the CFRB concludes:

“Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.”

That is absolutely correct.

As the chart below shows there is ZERO evidence that tax cuts lead to stronger sustained rates of economic growth. The chart compares the highest tax rate levels to 5-year average GDP growth. Since Reagan passed tax reform, average economic growth rates have only gone in one direction.

(Click on image to enlarge)

However, the most likely unintended consequence of the proposed tax “cut” bill is that it will likely be the largest tax “hike” on middle class Americans since President Reagan. Take a look at the proposed tax bracket chart below.

Now, compare that with the actual breakdown of “who pays taxes.”

“The bottom 80% currently pay only about 18% of individual taxes with top 20% paying the rest. Furthermore, the bottom 40% currently have a NEGATIVE tax liability, and with the new tax plan cutting many of the deductions currently available for those in the bottom 40%, it could be the difference between a tax refund and actually paying taxes. “

(Click on image to enlarge)

“Of course, those in the top 20% of income earners are likely already consuming at a level with which they are satisfied. Therefore, a tax cut which delivers a few extra dollars to their bottom line, will likely have a negligible impact on their current levels of consumption.”

Given the newly designed tax brackets compress individuals into few groups, it is quite likely a large chunk of the bottom 80% will likely experience a tax hike. With the bottom 80% already consuming at max capacity, as discussed yesterday, a tax hike will hit the economy right where it hurts the most – in consumption expenditures. 

 “As the chart below shows, while savings spiked during the financial crisis, the rising cost of living for the bottom 80% has outpaced the median level of ‘disposable income’ for that same group. As a consequence, the inability to ‘save’ has continued.”

(Click on image to enlarge)

Regardless, the proposed tax bill is just the first step.

Let the “horse trading” begin.

In the meantime, while we await the actual tax reform bill, here is your weekend reading list.

Trump, Economy & Fed

• Jay Powell – A Quiet Leader by Danielle DiMartino-Booth via MoneyStrong
• The People Vs. Donald Trump by Caroline Baum via MarketWatch
• The GOP Snatched Defeat From Jaws Of Victory by George Will via National Review
• Why The Market Surged Under Trump by Simon Constable via Forbes
• A Step Backwards For Fiscal Responsibility by Committee For A Responsible Federal Budget
• GOP Tax Plan Talking Points Released by Tyler Durden via ZeroHedge
• Not Trillions, But Just $250 Billion In Repatriation by Joe Ciolli via BI
• Next Fed Chair Has A MUCH Tougher Job by Pedro Da Costa via BI
• The Giant GOP Tax Reform Bill by Bob Bryan via BI
• Democrats Are Making The Wrong Argument Against Tax Plan by Pedro Da Costa via BI
• Tax Plan Could Lead To Lot’s Of Stock Buybacks by Elena Holodny via BI
• Americans Are Officially Freaking Out by Deena Shanker via Bloomberg
• Trump Lucks Out With Strong Economy by Derek Thompson via The Atlantic
• Jerome Powell – The Boring Choice by Patti Domm via CNBC
• The Fading Scent Of The American Dream by Charles Hugh Smith via The Daily Reckoning

Markets

• The Strongest Melt-Up Gains Start Here by Greg Guenthner via Daily Reckoning
• Stock Investors Should Fear THESE 4-Words by Shawn Tully via Fortune
• The Dimming Of “Morningstar’s” Light by SA Gil Weinreich via Seeking Alpha
• A Roadmap To Cheaper Stocks by Michael Brush via MarketWatch
• Elevated Evaluations & Low Future Returns by Kern, Kwok & Joslin via TFC Financial Mgmt.
• Buffett Indicator Says Investors Playing With Fire by Shawn Langlois via MarketWatch
• FAANG Stocks Take A Bite Out Of Bears by Michael Kahn via Barron’s
• The Greatest Fear Is The Lack Of Fear by James Rickards via Daily Reckoning
• Companies Most Likely To Benefit From Tax Plan Rise by Joe Ciolli via BI
• Trend Growth Remains 2% by Bryce Coward via Knowledge Leaders
• A Rising Tide Of Earnings Shenanigans by William Watts via MarketWatch
• The Roach Motel: You Probably Own Some Roaches by Michael Lebowitz via RIA
• A Long Time Ago In A Market Galaxy Far, Far Away by Doug Kass via RIA

Research / Interesting Reads

• The Bitter Irony Of Real Disposable Incomes by Wolf Richter via Wolf Street
• We Aren’t Prepared For The Next Recession via Annie Lowrey via The Atlantic
• You Got Volatility All Wrong by Simon Maierhofer via MarketWatch
• Value Investor “Dead Pool” by Kevin Muir via The Macro Tourist
• The Bitcoin Bubble by Buttonwood via The Economist
• Happy Days For Consumers by Ed Yardeni via Yardeni Research
• Lessons Learned From Friedman, Sowell & Mom by Gene Epstein via Barron’s
• The Treasury Bubble That Never Came by Mazzoleni & Garg via Research Affiliates
• Tale Of Two Economies Top 40% & Bottom 60% by Ray Dalio
• The Full Reset by Morgan Housel via Collaborative Fund
• Market Valuations NOT Justified By Low Rates by John Hussman via Hussman Funds
• Remember To Come Back In November by Dana Lyons via The Lyons Share
• Edge Of The Cliff (Video) by Jesse Felder via The Felder Report

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations which do not meet these requirements are speculative.” – Benjamin Graham