Trump's Fiscal Policy Proposals and a Market Correction

The markets' post-election reactions -- higher stocks, Treasury yields and dollar -- have been based in part on expectations of pro-growth policies under the Trump administration.  The boost to the economy may be smaller and take longer to occur than the markets now expect, however, providing a fundamental reason for the corrections -- lower stocks, Treasury yields and dollar -- that technicians say are coming.  Nonetheless, the extent and timing of the policies may not get full market attention until we get closer to the January 20th start of his administration.

Trump's proposal for cutting individual taxes is an example.  He wants to cut tax rates and eliminate the ObamaCare 3.8% surtax on capital gains/dividends and investment income as well as the Alternative Minimum Tax and most of the Estate Tax.

Timing
1.  It should take a number of months before tax legislation gets through Congress.

       a.   There could be changes to Trump's proposal, particularly since it differs somewhat from the Republican Congressional tax plan and runs counter to Republicans' desire to cut the Federal deficit.  Hearings and debate could delay implementation.
       
2.  The lower tax rates -- particularly at the upper end -- could spur more risk taking and work effort.  This supply effect would likely take time to develop.

3.  The other parts of his plan would not show up until final tax payments are made in 2018.

Magnitude of Impact
1.   The lower tax rates would boost disposable income quickly.   But, with much of the reduction at the upper income levels, a good share of the freed-up income will likely be saved rather than spent -- reducing the boost to economic activity.  However, the elimination of the Estate Tax for most everyone could lift spending by those who were saving to meet a "bequest" goal.

       a.  Democrats are likely to complain about the distributional aspects of his proposal.  Ideas to make the tax code more progressive could be counter-productive if they discourage economic activity -- which would hurt lower-income people.  

2.  Part of the spending would be on imports, also reducing the boost to US economic activity.

3.  But, a small boost to consumption is not undesirable at this time, given that the economy is close to full employment and growing near trend. 

4.  Given the likely limited near-term boost to the economy and the absence of a need to do so, the Trump proposal's main rationale may be the longer-term incentive for risk taking and work effort.  But, the magnitude of this impact is anybody's guess.