Feb. 15 has passed and the IRS is complete with processing the new withholding tables that take into account the new tax cuts enacted by Congress and President Donald Trump.
If all has gone according plan, your employer has applied the new rates — full disclosure: my employer has — and about 80 percent of you should be seeing a tax cut in your paycheck. Out of 200 million or so taxpayers, that is 160 million people or so, who are now be feeling the benefits of the Trump tax cuts.
Overall, the lower rates will account for $94 billion of additional pay for Americans in 2018 on the individual side of the ledge before deductions, or about $7.8 billion extra a month, according to the Joint Committee on Taxation. In 2019, that will jump up to more than $135 billion, or $11.3 billion a month.
That should provide nice improvement to the economy, which is more great news for the American people. Gross Domestic Product has not grown above an inflation-adjusted 4 percent since 2000 and not above 3 percent since 2005.
The biggest boost could come on the business side of things, with the corporate rate being lowered to 21 percent below the global average. That will be worth $101 billion in 2018, and $125 billion in 2019.
Repatriation also looms large, with trillions of dollars of foreign earnings kept overseas expected to be repatriated over the coming years. Apple alone said it would repatriate $350 billion over the next five years and create 20,000 jobs here.
It’s all prospective, but now there is real reason to be hopeful that those numbers start to move into the right column. But there are no guarantees. In the 1980s, the Reagan tax cuts became effective Aug. 1981, but you know what happened? There was a big, ol’ recession, which had already begun in July 1981 when the business cycle peaked. Unemployment spiked and growth contracted.
The headwinds at the time including sky-high interest rates as the Federal Reserve sought to slay the inflation dragon from the 1970s. Once the dust settled, however, in 1983 and beyond, the economy roared.
There are some signs that in the U.S. we have once again reached or are ready to reach the end of the business cycle. The stock market, particularly, the Dow Jones Industrial Average peaked above 26,000 and now is in a corrective mode.
On the other hand, interest rates have not yet inverted, that is, the distance between long-term and short-term interest rates. In fact, the 10-year, 2-year constant maturity has actually risen in 2018. Usually, the business cycle ends sometime after the yield curve is inverted, meaning the short-term interest rate was higher than the long-term interest rate. Right now, we’re not there yet. That might be bullish in 2018 if there’s another rally.
Either way, whether the business cycle is over or has a little more juice left, thanks to the Trump tax cuts, about 160 million Americans will have more cash to spend and invest to take advantage of hopefully the next boom, even if there is a major correction first. Hang tight.