Impact of Tax Cuts on Interest Rates, Dollar Strength, and Trade Deficit

SOURCE www.breitbart.com
Tax cuts do not necessarily lead to higher interest rates, a stronger dollar, or a wider trade deficit. The global demand for dollar-denominated assets primarily determines the strength of the dollar. The trade deficit is driven by global capital flows, not budget policy. Increased demand from tax cuts is likely to be spent on domestic services rather than foreign goods, blunting the impact on imports.

Key Points

  • Global demand for dollar-denominated assets primarily determines the strength of the dollar
  • Trade deficit is driven by global capital flows, not budget policy
  • Increased demand from tax cuts is likely to be spent on domestic services rather than foreign goods

Pros

  • Tax cuts do not necessarily lead to higher interest rates
  • Increased demand from tax cuts likely to be spent on domestic services rather than foreign goods

Cons

  • The theory that tax cuts lead to a wider trade deficit is old, contested, and often wrong