Month: February 2018

Unless you’re living under a rock, you heard Congress passed the Tax Cuts and Jobs Acts last year. As always, there are boos and yays for any bill our congressmen and congresswomen pass. Whatever your opinion is about the new tax bill, most popular part of the act was tax cuts!

Let me refresh your memory, so you can remember the specifics about the tax cuts. The Republican controlled Congress has simplified the income-tax code, which affects nearly every working American. The Tax Cuts and Jobs Acts suggests the current seven individual tax brackets into only four. These new tax brackets have new rates and thresholds for where higher taxes kick in. From the image below, the new bottom tax rate covers more income than the current 10% and 15% brackets do. As a result, the GOP is striving to lower taxes for many middle-class households. However, the wealthy are expected to face same tax rate, so their income tax will be unaffected by the newly proposed tax plan.

The Tax Cuts and Jobs Act also projects to lower taxes for various businesses. The Republican lawmakers plan to reduce corporate tax rates from ridiculously high 35% to 20%. This is huge for the United States as multinational corporations will keep more jobs in the country instead of outsourcing to developing nations for cheaper labor. The corporate tax code also includes 30% deductibility of cash flows, immediate deductibility in capital investments and removal of taxes on active foreign profits. If the bill becomes successful, the United States could enforce one of the lowest corporate tax policy in major developed nations.

President Trump wasn’t lying about the America First policy as he came with fire and fury. He introduced several tariffs hoping to bolster domestic production, while hoping to reduce imports and international reliance.

Before I ramble about how politics will affect our economy, let me first explain what a tariff is. A tariff is a tax or duty imposed on imported goods and services. Imports are considered bringing goods and services from abroad into your country for sale.

Governments impose tariffs to raise revenue or to protect domestic industries from foreign competition. The goal is to make foreign-produced products more expensive, which attractively portrays domestic goods and services to consumers.

There are primarily two different types of tariffs: protective tariff and revenue tariff. The main purpose of a protective tariff is preventing foreign companies selling products in the domestic country. These tariffs have extremely high tax rates, which foreign countries don’t even considering selling to.

On the other hand, revenue tariffs want to raise money for the government. Think of this as a tax on gas, alcohol, or cigarettes. The government taxes these products because they know customers will purchase these goods despite the increase in price in these goods. As a result, consumers still get their products, the government makes some money.

Wow tariffs sounds so great! Unfortunately, they are not as pleasant as they sound theoretically. Unintended side-effects can actually hurt the domestic economy. For instance, domestic industries become less efficient and less innovative due to reduced competition. Furthermore, the domestic industries can become a monopoly, which tends to push up prices and reduces supply. Additionally, other nations can retaliate your economic policy by imposing their very own tariff. Consequently, this leads to a trade war, which is no bueno for either country.

Now we a good foundation about tariffs, let’s discuss how Trump’s policy will affect the economy and business behavior. One of the newly introduced US tariffs is imposed on washing machines. The regulation applies a 20% tax on the first 1.2 million imported residential washers in the first year then 50% for additional imports.

Yikes! That is brutal for foreign competitors.

However, foreign manufacturers are figuring out solutions to bypass this expensive tariff. For instance, few companies proclaim they could incur the additional costs and still post major profits for their business. Other companies exported millions of washing machines years before the policy became enacted because they feared Trump’s America First. The last popular decision was construct a manufacturing plant in the United States, so they would not have to worry about the tariff at all.

Ultimately, we have to wait until the future to understand the true impact of this tariff.

President Trump’s State of the Union captured the attention of everyone this week. Trump took full advantage of this mandatory, yearly speech by establishing his budget, nation’s economic report, and outlining his legislative agenda. He hit on key topics, such as immigration, North Korea, and Guantanamo Bay. However the one subject matter that grasped the nerdy minds of all economists: INFRASTRUCTURE.

Donald Trump emphasized massive infrastructure spending a top priority for the upcoming year. He plans to pledge $1.5 Trillion to revamp the nation’s organizational structures and facilities.

Yes, you read that right. Trillion with a huge capital T. This plan is extremely essential for a strong foundation of the entire nation.

Infrastructure is one of few things both Republicans and Democrats have planned on their agenda. The debate on this issue is going to be how to fund the infrastructure bill, how much money to allocate for the infrastructure bill, and highlighting which cities and highways grasping the most money from the infrastructure bill.

You must be wondering why infrastructure is so important to the economy.

Public infrastructure investment is one of most common fiscal policies used by the government to fight recessions. The government stimulus spending is the classic Keynesian economics philosophy. Keynesian economics is a popular economic theory of total spending in the economy increases GDP output and inflation.

Coming back from the small tangent, the $1.5 Trillion infrastructure package creates new projects. Therefore, the new projects employees more people and creates more businesses for industrial companies.

Additionally, the increased employment leads to more citizens with more disposable income. As a result, the economy becomes more stimulated, since consumers will be spending more in the market. Consequently, businesses will make more revenues, which leads to more business prosperity.

As a good as this sounds, there are many critics of this plan. Since the United States economy is not in a recession, few economists believe the additional economic stimulus might lead to overheating in the economy. This can lead to overly excessive increase in inflation. Therefore, consumers will be buying goods at outrageous prices. Also, businesses will have to cut production, since input costs escalated.

All in all, despite all the economic controversy, America will finally get stable highways and smooth public roads.