Recent polls indicate that the political environment in Washington, D.C., is the top economic risk cited by people of almost every age, income, gender, racial/ethnic group and political affiliation.
This isn’t a stretch due to the fluidity of recent events. In the long run, stock prices will reflect whether President Trump’s policies create more disposable income, boost corporate profits and raise salaries.
Cutting taxes does that in the short term, but the long-range goal is to beat inflation through higher salaries and enhanced retirement funds, which hasn’t been the case for most working families during recent years of pedestrian economic growth.
Treasury Secretary Steven Mnuchin said Trump’s tax reform will create 1.7 million new jobs, save families $4,600 per year, raise wages by 8% and bring to an end corporate inversions that eliminate incentives to offshore profits and jobs that would spur corporations to expand and reinvest in U.S. manufacturing.
It all sounds good and the stock market has been in rally mode with baited breath leading up to this pronouncement of the “Make America Great Again” tax plan that now has to work its way through Congress.
Critics already are fanning the flames over pitfalls of the Trump tax plan. The naysayers complain that it won’t replace lost tax revenue in the early years and that the government will have to borrow trillions of dollars to pay its bills.
The new tax plan assumes the incentives will result in a 4% rate of gross domestic product (GDP) growth that will drive organic tax receipts, making the plan revenue neutral.
After the economy posted first-quarter GDP growth of only 0.7%, which was Trump’s first quarter in office, it’s no surprise the doubters of this grand stimulus scheme are making lots of noise.
They warn that another $2 trillion of deficit spending not matched by revenues will blow a hole in the bond market with all bets off. It could mean rating reductions for U.S. debt, weaker demand for Treasuries, soaring interest rates and inflation.
But these are the same critics who refuse to tackle the most threatening of all fiscal forces – entitlement spending that accounts for more than 60% of every dollar of the federal budget.
A rational person might conclude “we better grow the economy at 4% or better, or we’ll drown in entitlement spending.”
After seven years of modest declines, the federal budget deficit is projected to swell again, adding nearly $10 trillion to the federal debt over the next 10 years, according to projections from the nonpartisan Congressional Budget Office, if the status quo for the current tax system is maintained.
The numbers reveal the strain that government debt could have on the economy as President Trump presses to slash taxes and ramp up spending.
The federal deficit will be a major challenge to House Republicans, who were swept to power in 2010, after making controlling red ink a major part of their agenda under former President Barack Obama. Statutory caps imposed in 2011 on domestic and military spending have helped temper the deficit.
But those controls could be overtaken by health care and Social Security spending that will rise with an aging population and are toxic political fodder to raise in legislation aimed at balancing the budget.
Now, congressional leaders will have to choose between the cause of fiscal prudence and the demands of the new president, who wants $1 trillion in infrastructure spending over 10 years, a surge in military spending and large tax cuts for individuals and corporations. Democrats are likely to oppose large tax cuts, but they will press Mr. Trump to make good on his promise to spend big on infrastructure.
Democrats in the Senate likely will go along with the $1 trillion plan to rebuild the nation’s roads, bridges, rails, transit systems, airports, sewer systems and power grid.
But “we will not cut middle-class programs like education and health care to pay for it,” said Senator Chuck Schumer of New York, the Democratic leader. That is the conundrum the Congressional budget committee faces during the next few months.
With that in mind, and in what is shaping up to be one of the greatest Congressional donnybrooks of all time, what are income investors to do while this all gets sorted out? The most logical answer is to stay invested in a powerful dividend growth strategy.
Companies with strong and durable businesses that have the ability to double their dividends every six to seven years reflect pristine balance sheets and fiscal prudence to shareholders.
The tax plan, as it is proposed, stands to greatly benefit corporations with robust stock buyback and dividend policies. It behooves investors to ride those coattails all the way to the bank.
One way to do so is through my Cash Machine newsletter. To learn how to enhance your returns with enticing dividend yields, click here.
Investors also can turbocharge their dividend growth portfolio by adding an effective covered-call strategy to drive extra income, essentially doubling or tripling the yield on an income-generating portfolio. One simple and easy method is to follow my covered-call advisory Quick Income Trader by clicking here.
In that trading service, I manage a stable of no more than seven live trades, updated weekly and designed to pay monthly call premium to investors seeking a low turnover, affordable method to maximize return.
No matter what the net effect of the tax plan is going to result in, put to work a plan to stay ahead of taxes and inflation. Quick Income Trader is just the ticket and doesn’t take an act of Congress to put into place.
Until next time,
Bryan Perry has spent more than 20 years working as a financial adviser for major Wall Street firms, including Bear Stearns, Paine Webber and Lehman Brothers. Bryan co-hosted weekly financial news shows on the Bloomberg affiliate radio network, and he’s frequently quoted by Forbes, Business Week and CBS’ MarketWatch. With three decades of experience inside Wall Street, Bryan has proved himself to be an asset to subscribers who are looking to receive a juicy check in the mail each month, quarter or year. Bryan’s experience has given him a unique approach to high-yield investing.