Sounds almost incomprehensible. The question is can the world's economies grow enough to turn that debt number into an insignificant concern? Debt in and of itself is a mechanism that tends to accelerate growth and that growth reduces the negative economic significance of that debt. Borrow $500K to buy a home worth $700K. Over time if the value of the home increases to $1.0 Million, the negative impact of the debt is reduced.
Government, businesses, and individuals all borrow on the assumption that they will service their debts either by paying the principal and interest or by rolling over the debts into new loans. More importantly, they borrow today to consume today, even though they do not have the money, because they rely on their continued ability to earn more and more as time goes by.
The 2008 crisis is a case in point. When income stagnates debt payment become problematic. When interest rates on that debt rise, debt payments become problematic. When the goods and services you provide become less attractive to others income declines and debt payments become problematic. When the value of the assets you own decline rather than increase, debt becomes a more significant negative economic burden.
Below is the content of the 2017 Tax law changes passed by the Republican controlled Congress that effectively increased US debt by primarily reducing corporate taxes. The hope is that this reduction of corporate taxes will spur increased hiring, increased wages, increased growth, increased well being for all Americans. Stay tuned.
The Senate voted 51-48 to pass the Tax Cuts and Jobs Act. The House voted 227-203 in favor. The Executive Branch signed the Tax Bill into law.
The premise for the tax cuts is the following:
*Economic Growth has been anemic at below 3% since the 2008 Sub Prime Mortgage Financial disaster.
*In order to push growth along, the Republican Congress believes that by lowering the Corporate Tax rate to 21%, (a 14% reduction), businesses both large and small will increase capital spending, more hiring will occur, wages will rise, all causing more spending, which in turn generates more revenue to the Federal Govt. to offset the projected $1.5 Trillion Deficit this tax bill will produce.
*Lastly, that by increasing the individual exemption, while removing or limiting itemized deductions, thus simplifying the tax code, individuals will reap a modest tax cut themselves in the process.
The Bureau of Economic Analysis, an agency of the US Dept. of Commerce, says that gross domestic product (GDP) increased at an annual rate of 3.2 percent in the third quarter of 2017. An indication of reasonable growth, not anemic growth. Lowering the corporate tax rate will make them much more profitable than before the passage of the tax bill.
Many CEO's have been mum on how they will use the newfound liquidity.
Here is what to look for going forward:
How do you feel? Likely others feel the same way.
This influences GDP (gross domestic product). An increase in which suggests more demand for consumer goods. Since workers are required to manufacture new goods, increases in manufacturing activity should boost employment and wages.
Inventory Levels & Retail Sales
High inventory levels can reflect two very different things: either that demand for inventory is expected to increase, meaning higher consumer spending, or that there is a lack of demand, meaning lack of consumer spending.
Housing Market & Building Permits
Are housing prices going up or down? Are applications for Building Permits going up, or down?
How to plan going forward and what does this tax law mean to you? Likely, the answer to these questions will be quite different for each individual or family.
Tax Planning & Professional Financial Service.
For the most part, tax filing professionals like CPA's and enrolled agents provide high quality tax filing services to their clients. However, they rarely, if ever, have the time or the desire to entertain tax planning strategy sessions with you.
Those who fail to plan, end up planning to fail!
In our experience problems sometimes arise suddenly in peoples lives because of unanticipated consequences. That is the definition of "failing to plan" for the possibility of various contingencies. Most often people call us after the fact when it is too late to do anything.
Do you have the time to make one phone call, or send an email?
If the answer is YES then you are on your way to planning a course of action.
If the answer is NO. Well......there isn't much one can say about that.