The relationship between tax cuts and the U.S. economy’s external sector is simple: A reduction of income tax liabilities raises households’ disposable income, which drives personal consumption, residential investments and, indirectly, business capital outlays — the main segments of the economy that represent 85 percent of America’s GDP. All that new purchasing power then leads to rising demand for imports, while the expanding domestic markets lower the pressure on businesses to sell their goods and services abroad.The result is a deteriorating trade balance: a decline of a trade surplus, or, most frequently, an increase in trade deficits.That is the likely scenario one can expect from tax cuts the U.S. Senate passed last Friday.
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