Tax Cut Unlikely To Help U.S. in the Long Term

by: Robert Nabloid

On Monday, the TSX fell over 600 points, a 4.75% drop on top of the drop from last week. Canada wasn’t the only market hit: London down 5.48%, Paris down 6.83%, Frankfurt down 7.16%, and Asian markets did much the same. All of this occurred while the U.S. markets were closed for a holiday. It seems that investors don’t think the government will be able to do enough ‘printing/borrowing/or cutting of taxes’ to avoid a recession. Investors fear Bush’s economic stimulus plan won’t work as planned and the Fed’s only weapon is inflation, which also hurts citizens and the large consumer economy.

Tuesday should be an interesting day. Can $145 B worth of tax cuts help U.S. consumers? I don’t know the terms of the stimulus package, I’ll go read up on that shortly. Unless the tax cuts are retroactive to 2007, I don’t see how tax cuts will immediately impact spending in a big way. I also don’t think U.S. consumers should necessarily spend their tax savings. For those with debt, I hope they put the extra money against their loans. A question I do have is, will the tax cut be enough to even counter the rate of inflation from a lower U.S. Dollar in terms of increasing a family’s budget? Also keep in mind, higher deficits will cause more U.S. Dollar weakness and could lead to an increase in inflation.

I do think we are in the beginning stages of a recession, but nothing goes straight down. I think we may even have an up day on Tuesday. On a day when so much news is slated to come out, who knows what will happen! Most of the news is supposed to be “good”, if you call government interference with the markets good. Just remember, nothing goes straight down. Market turbulence is likely.

I would generally be very excited about a tax cut, but when it happens during a time of major deficits, I only worry more about the balance sheet of the U.S. government and the effect it will have on the value of the U.S. Dollar and inflation. Unless government spending is cut so the already staggering deficit is lessened or completely erased, I don’t see how a tax cut will ultimately help the United States of America or its citizens in the long-term. Just as people can be indebted to others, so too can governments.