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WILL THE LAST ONE TO LEAVE THE HIGH-TAX STATES PLEASE TURN OUT THE LIGHTS?

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At the end of 2017, the historic Trump tax bill made it through Congress and was signed into law by President Trump. The new law cuts taxes on individuals and corporations, increases the standard deduction, provides incentives for multinational corporations to bring offshore earnings back home and creates other incentives for business investment.

The impact of these tax cuts on the budget deficit is huge; estimated at $1.4 trillion over the next ten years. The incentives are supposed to provide enough stimulus so that increased tax collections on added output would offset those deficits to a great extent.

The early evidence is that none of this is working as planned. The economy produced growth of 2.3% in the first quarter of 2018, only slightly better than the 2.2% average since the end of the last recession in 2009, and weak by historic standards.

Updated budget deficit estimates are already higher than those projected when the tax bill was passed. Corporations are using their offshore cash windfall for stock buybacks and dividends, not new investment. It looks like weak growth and higher deficits are in the cards; the opposite of what the tax bill supporters hoped for. And, there are unforeseen side effects that could make the situation worse.

The new law eliminated the federal tax deduction for state income taxes. Since high-bracket taxpayers get a 37% tax benefit on available deductions, the marginal impact of eliminating the deduction for state income taxes is a 60% increase in state income taxes. This doesn’t matter much in low tax states like Tennessee and New Hampshire, but it’s a huge blow to the high-tax states such as New York, New Jersey, and California.

Readers may not have much sympathy for the high-tax states, but they are also among the most productive, densely populated and capital-intensive areas of the country. If a migration from high tax to low tax states begins, it may be good for the companies and individuals that are migrating, but it would be catastrophic for the overall U.S. economy.

According to this article that migration has now begun. No doubt the exodus will grow. That’s another headwind for growth, and another boost to out-of-control deficit spending.

Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

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