Our financial markets are in turmoil, and the instability isn’t ending anytime soon. The stock market lurches spasmodically every time President Trump announces his on again off again tariff hikes. The bond markets are at all-time lows because of uncertainty of a trade war. And with the 30-year Treasury bond yield below 2 percent for the first time ever, the Trump tax-cut driven deficit will be substantially over $1 trillion this year.
If that weren’t enough, the president continues to bully the Federal Reserve, to lower interest rates to prop up the financial markets.
Amid all this chaos, the Trump administration is considering giving another massive tax break to the wealthy.
This tax scheme, which would benefit the president’s portfolio to a great extent, would change the definition of the cost of an investment, allowing investors to adjust the value of an asset due to inflation.
For example, if you purchase a stock or real property for $100,000 and sell it for $200,000, and inflation doubled according to the consumer price index (CPI), you wouldn’t owe any federal taxes. This tax-break giveaway to the wealthy would add about $100 billion a year to the already exploding deficit.
Indexing tax breaks to inflation works especially well for real estate investors, which is how our President and his family make a living. Trump’s real estate holdings would also benefit from a cut in interest rates by the Fed, even though they are already ridiculously low, and that’s why he’s bullying them.
Lower interest rates enable investors to borrow more money with lower payments, thereby juicing real estate values.
Other tax initiatives benefiting the Trump organization, like 1031 exchanges, specifically now apply only to real estate. This tax code change, occurring in 2018, during Trump’s administration, enables investors to defer capital gains taxes if they purchase another property of equal or greater value within 180 days.
Also, investing in newly created Opportunity Zones defers taxes on previously profitable investments, if profits are reinvested in Opportunity Zones and held for seven years.
After that, the investor gets a 15 percent discount on any taxes owed from the original investment. Any capital gains on new investments in an Opportunity Zone are tax-free after 10 years. This law was supposed to create jobs in economically disadvantaged areas, however real estate investors, like our President, are the ones who are benefitting most.
Finally, carried interest continues favorable tax treatment for hedge fund managers and syndicators of real estate deals, such as the Trump organization.
Raising taxes on carried interest was discussed to help pay for Trump’s $1.5 trillion tax cut. Instead, democratic blue states, like New York, paid for a chunk of the tax cut when residents lost the ability to deduct state and local real estate taxes from their federal tax burden.
The huge deficits, $22.5 trillion and growing for the National Debt, and close to an additional $1 trillion budget gap this year, are leading us to a path of financial ruin. The national debt is so high, starting in 2024, all newly issued U.S. debt will be applied to the payment of interest on existing debt, with no reduction in principal.
Sounds like a Ponzi scheme to me!
There are four ways out of this Trump debt/deficit quagmire, and none of them are good. First, Congress could balance the budget ASAP, which will be extraordinarily difficult with infrastructure, Social Security, Medicare, and Disability all in dire need of funding.
Second, opt for austerity, which politicians won’t allow because it will affect their re-election and crush the artificially juiced stock market.
Third, default on debt, which would cause world-wide chaos.
Fourth, allow excessive 1980-type inflation, which would cheapen the $22.5 trillion in National Debt. However, every 1 percent hike in average interest rates would cause $225 billion in higher annual debt service, making balancing the budget impossible.
President Trump promised his tax cuts would pay for themselves, by creating 4-5 percent annual GDP growth.
However, with the current huge budget deficits in a modestly strong economy, current GDP growth is anemic at a little over 2 percent.
With taxes already cut, and interest rates at record lows, there is little ammo left to fight off the impending recession. All this being said, Trump and his family are making money hand over fist through all these ludicrous real estate centered tax cuts.
In summary, President Trump’s tax initiatives seem to be crafted for his own enrichment. Interest rates are at rock-bottom with the chief executive wanting them even lower, and his tariff driven “America first” economic plans are ill-conceived.
America is on a path toward unsustainable debt, and nobody in Congress seems to care. I consider myself an optimist, but lately, it has been difficult to remain one, with America’s bleak financial future on the horizon.
