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Making America’s Deficits Great Again

The new tax legislation pushed through by Donald Trump and congressional Republicans is virtually certain to raise the budget deficit and, in turn, the current-account deficit. Whatever the resemblance to the Reagan-era tax cuts of 1981-1983, it's not morning in America.

FRANKFURT – US President Donald Trump and congressional Republican allies have succeeded in passing their big tax legislation. While it lacks many of the desirable attributes of true tax reform, it amounts to a success for Trump, who failed to deliver any other major piece of legislation during the first year of his administration. But what will it mean for Trump’s other major promise, to cut the US trade deficit?

Simply put, the Republicans’ tax law – which emphasizes big cuts, especially for corporations and the highest-income earners – is virtually certain to widen the budget deficit and, in turn, increase the current-account deficit. Trump’s legislative victory implies the return of the infamous twin deficits that followed George W. Bush’s tax cuts of 2001 and 2003, and Ronald Reagan’s cuts of 1981-1983.

There are different ways to measure the balance of payments, each appropriate for different purposes. The narrowest – and probably the least informative – measure includes only merchandise trade. Yet Trump likes to focus on bilateral merchandise balances, rather than a broader and more useful indicator, such as the overall balance of goods and services.

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