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Author Topic: Trump's Tax Reform
airforce
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Olav Dirkmaat takes apart trump's tax reform plan at the Mises Institute. Tax cuts are fine, but you need spending cuts at the same time. Without both, you turn into Illinois.

quote:
Two weeks ago, the Trump administration presented a detailed version of one of Trump’s most important election promises: a tax reform. Not only does the Trump administration propose to lower corporate taxes, their proposal also includes other tax reforms. However, the trouble is that Trump wants to lower taxes without cutting spending. As a result, the budget deficit and the enormous public debt are bound to swell. And, moreover, what does all this have to do with the Federal Reserve?

A Breakdown of Trump’s Tax Proposal

On September 27, the White House published a complete proposal for tax reform, which is titled “Unified Framework for Fixing Our Broken Tax Code.” You can find the complete proposal here.

Briefly summarized, Trump’s tax proposal consists of:

A lowering of the corporate tax to 20%
A ceiling for corporate taxes on small businesses of max. 25%
A one-time discount on the corporate tax when multinationals repatriate money that is currently being held abroad / off-shore
For the next five years, businesses are allowed to immediately write off capital expenditures (lowering, in the short run, the payable corporate tax)
The number of tax brackets of the personal income tax is reduced from seven to three (12%, 25% and 35%)
The standard deduction on personal income taxes is being doubled and the deduction for having children will be increased
Many existing tax deductions are eliminated or lowered
The death and estate tax will be eliminated

The tax reform is bound to be costly. Not only in the first year, but also in the years following.

The Laffer Curve

Of course, we all know (or ought to know) that countries with low taxes experience higher economic growth than countries with a higher tax burden. It is perfectly imaginable, therefore, that total tax revenues go up, while at the same time taxes are being lowered. When there exists more economic activity and more value is added, the tax base increases. Trump, in his enthusiasm, thinks he will be able to finance the entire tax reduction with mere economic growth, but that seems to be a stretch.

What Trump is implicitly referring to, is the Laffer curve:

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The story behind the Laffer curve is quite remarkable. According to the story, the (until that moment relatively unknown) economist Arthur Laffer tried to convince the former Chief of Staff, Donald Rumsfeld, that the proposed tax increase by the president at that time, Gerald Ford, was a bad idea. Laffer argued that the tax rate was already beyond its “optimum” (the “Revenue Maximizing Point” in above chart). A tax increase would therefore not result in more, but less tax revenues. On the spot, Laffer improvised and used a napkin to draw the now famous Laffer curve to convince Rumsfeld. Laffer was unable to persuade Rumsfeld, but the napkin did later turn into a museum piece.

Trump now argues precisely the same as Arthur Laffer did in the 1970s. But in contrast to Laffer, Trump uses the same argument in support of a tax reduction, rather than to avoid a tax increase. A tax reduction would bring us closer to the “optimum” and therefore increase total tax revenues, according to Trump.

This all seems perfectly reasonable, but ends up being a complete speculative guess. The shape of the Laffer curve cannot be derived from anything or anywhere, since the necessary data is by all means unobservable. And it is even less realistic to assume that, if we do not even know the shape of the curve, we are able to figure out at what point of the curve we currently find ourselves.

According to my (fallible) judgment, it seems more likely that we are somewhere between the “Revenue Maximizing Point” (the optimum for tax revenues) and the “Growth Maximizing Point” (the optimal point for economic growth). Yes, lower taxes can lead to higher economic growth. Capital investments become more tempting and marginal investments suddenly become profitable at a lower tax rate; capital accumulation is incentivized. But this does not mean that this increase in economic growth is able to finance the tax reduction; tax revenues will go down rather than up.

Consequences for the Deficit and Public Debt

The Urban-Brookings Tax Policy Center (TPC) apparently agrees with me. They estimated the impact of Trump’s tax proposal on the budget deficit for the next ten years. They also took into account the projected economic growth (real GDP growth).

I took these estimates and compared them with the baseline projections of the Congressional Budget Office (CBO), which (for the moment) does not take into account a possible tax reform.

You can see the result below:

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In this chart, we observe that both the federal deficit (as percentage of GDP) and total public debt (as percentage of GDP) turn out to be considerably higher with Trump’s proposed tax plan. In 2018, the federal deficit would amount to 3.5% of GDP, instead of 2.4% without any tax reform. But also in later years, the impact on public finances remains rather negative. To such a degree, that after ten years total public debt does not amount to 103% of GDP, but 111% of GDP, despite the fact that GDP will be considerably higher than in the absence of any tax reform.

In sum, trading short-term growth for future growth?

Consequences for the Fed and Inflation?

In short, the deficit and debt will only increase at an even faster pace, but why is this relevant to investors?

The reason why is easy to grasp. A large share of the Fed’s balance sheet consists of long-term public debt. These long-dated US Treasuries depend to a large degree on the creditworthiness of the US government. And Moody’s already took aim at the proposed tax reform and reached the conclusion that Trump’s proposal “would probably weigh on the U.S. government’s credit outlook, on concerns that it would cause the federal deficit to swell”, as we can read at Bloomberg.


A lower credit rating would mean that yields on US Treasuries might rise in the mid- and long-term and that the odds of an eventual default will mount. And this, in turn, means that the assets which back the US dollar (in this case, long-dated US Treasuries) will deteriorate. The quality of the dollar will decay, which will impact the demand for dollars and as such the value of the dollar in the medium term.

Trump is apparently willing to sacrifice future for present growth on the back of the American taxpayer. Perhaps his proposal to allow immediate depreciation of capital expenditures for the next five years (conveniently, give and take his presidential term) is more revealing than many commentators currently think. As if he were a veteran in politics, Trump is trying to maximize short-term gain at the expense of long-term downside.

Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
airforce
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The tax plan is finally out. Corporate tax rate drops to 20%, and your 401K is safe, which is good. Sadly, ObamaCare's individual mandate is safe, too. And I sure haven't seen much in the way of spending cuts from the Trump administration. And reform? Not much there either, though it does stop subsidizing states with high tax rates, and it tweaks the mortgage interest deduction a little.

Still, I think it's likely to pass. Trump really needs a win somewhere this year, maybe this will be it.

Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
airforce
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There's still a push to repeal the ObamaCare mandate, and another one to keep the deduction for state and local taxes. Stay tuned.

Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
airforce
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The Senate plans to repeal the ObamaCare individual mandate in their tax reform proposal.

quote:
Senate Republicans have decided to include the repeal of the Affordable Care Act’s requirement that most people have health insurance in a sprawling overhaul of the tax code, merging the fight over health care with the high-stakes effort to cut taxes.

Repealing the so-called individual mandate, as President Trump had urged, would help Republicans with the difficult math problem they face in refining their tax plan. But it also risks reigniting the contentious debate over health care that Republicans found themselves mired in for much of the year.

“We’re optimistic that inserting the individual mandate repeal would be helpful,” Senator Mitch McConnell of Kentucky, the majority leader, told reporters.

In order to be protected from a Democratic filibuster, the tax bill can add no more than $1.5 trillion to federal budget deficits over a decade, and it cannot add to the deficit after a decade. Eliminating the mandate would free up more than $300 billion over a decade that could go toward tax cuts, according to the Congressional Budget Office.

Because getting rid of the mandate would lead to a decline in the number of people with health coverage, the government would spend less money on subsidized health plans.

Senator John Thune of South Dakota, a member of the Republican leadership who also serves on the Finance Committee, said the savings from repealing the mandate would be “distributed in the form of middle-income tax relief.” (...)

Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
airforce
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Ron Johnson (R - Wisconsin) says he will vote NO on the Senate tax plan. If they lose one more, Pence will have to cast the deciding vote. If they lose two more...

Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
airforce
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The House has passed their tax reform bill. That was the easy part. It gets way harder from here.

Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
airforce
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How much does a tax cut "cost?" Tax cuts don't cost anything, unless you assume the government has ownership over everything you have. Tax cuts merely mean less money for the government.

quote:
People often speak of tax cuts using topsy-turvy lingo like this quotation from the Committee for a Responsible Budget: “the country currently spends $1.6 trillion per year on tax breaks.” Or, as The Hill claims: “GOP tax plan would cost $2.4 trillion.” Statements like these make it sound like a tax cut is something you have to buy — as in, you search Amazon.com for tax cuts, add it to your cart, and purchase it. Then your credit card is charged $2.4 trillion. This is very confusing and very common. With the Trump/Republican tax plan being discussed, this sort of language is everywhere.

Taxes are revenue for the government collected involuntarily from its citizens. Therefore, a cut in taxes simply means less non-consensual money is taken from taxpayers. It is not money changing hands from the government to citizens. Indeed, it is money not changing hands. A tax cut is lowering the rate of taxation, and similarly a tax expenditure is using exemptions, deductions, and credits to target particular situations for tax relief. George Reisman says:

quote:
…according to The Times, “Tax expenditures cost the federal government more than $1 trillion a year in lost revenue.”

When one recalls that in World War II, there was a 90-percent bracket in the federal income tax, and that the government has it in its power to impose such a tax rate on everyone but presently chooses not to do so, then it becomes clear that by the logic of the concept, the cost of tax expenditures to the federal government is not just $1 trillion, but many, many trillions. It is, in fact, everyone’s entire income and wealth.

Saying there is a cost for lower taxes is a rhetorical tactic meant to obscure what tax cuts really mean: less money for the government. However, it may feel like a cost for some vested interests.

The Cost of Tax Cuts


If cuts in taxes result in cuts to government spending, there are many groups who could bear a cost. When so many are dependent on government programs, politics becomes a bitter fight with high stakes. Thus, we have many varieties of “Hands off” slogans: Hands off my healthcare, Hands off my birth control (can be covered by Medicaid), or one of the most bipartisan, Hands off my Social Security. Because Social Security is “mandatory spending,” and workers “pay into it,” there is an even greater sense that it is “my” money. The deafening outcry over these programs being potentially cut may be understandable. On a human level, the pain and suffering would be very real for those the government has addicted to its services.

“Hands off my defense spending” is another popular one, although rarely phrased that way. A comparison of how much is spent on national defense reveals that military contractors have become skilled at keeping the “defense” money coming. The US spends by far more on its military than any other country — in fact, it spends more than the next 7 highest countries combined. As another example, the 4,000 warhead nuclear arsenal of the US is enough to decimate Libya, Syria, Iraq, North Korea, Iran, Russia, and China, and still have 2,897 warheads leftover for friendlier countries. The US spends billions each year maintaining this stockpile.

Taxes and Deficits

Sadly, the norm in recent history is for no adjustment of spending with tax cuts, and therefore many bring up concerns about the budget deficit. Indeed, this latest tax plan may very well result in a larger national debt.

The national debt and spending are both deeply problematic. Instead of insisting, as most Washington policy wonks do, that the US raise taxes to eliminate the deficit, let’s consider the situation from a principled, moral point of view.

Suppose we have two immoral actions: taxation and out-of-control government spending. If taxation becomes less than government spending, it leads to an undesirable outcome: a budget deficit/higher national debt. But less taxation also means less of an immoral action (i.e., taxation) and less of an immoral action is a step in the right direction. What is the moral solution to this dilemma? Is it to increase the immoral action of taxation back in line with spending, thereby eliminating the deficit? No, the moral solution is to reduce the other immoral action (out-of-control spending). That way both immoral actions are reduced and the undesirable outcome is eliminated.

And yet it’s always tax cuts and not the taxes themselves that get the blame. The Committee for a Responsible Budget continues: “the country currently spends $1.6 trillion per year on tax breaks — many of which distort economic decision-making and result in a misallocation of resources.” Tax cuts misallocate resources? What about government spending? It may be true that tax deductions, etc., might affect decision-making, but consider the following:

Say a thief breaks in to a woman’s house and takes a $1,000 in cash. The thief serendipitously has a change of heart and repents of his evil ways. He calls the woman on the phone telling her the location of the tree where he stashed her money. The woman goes to the tree to recover her money. She might not have planned to go to the woods searching for stolen money, but if she can retrieve what is rightfully hers she feels better off. Ultimately, it wasn’t the retrieval of her money that caused her change in behavior. The robbery was the cause.

Tax cuts, expenditures, loopholes, and other derogatory names for “less taxes” are necessary relief for free enterprise. Ludwig von Mises said “Capitalism breathes through those loopholes.” Murray Rothbard hoped that

quote:
… we can revive the lost tactic, not of "closing the loopholes," but of ever-widening them, opening them so widely for all indeed, that everyone will be able to drive a Mack truck through them, until that wondrous day when the entire federal revenue system will be one gigantic loophole.
Taxes themselves are an enormous cost to society. Cut them all.
Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
airforce
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There's a lot to not like about the current tax reform plan. But, well, it's not all bad. I guess I side with Rand Paul. It's better than nothing, and we can always change it for the better later.

quote:
The Senate and House produced tax reform bills in the last few weeks, similar in important ways, but different enough that they could be lethal to the tax reform efforts. The House passed its version and we are waiting on the Senate to either pass or reject their own version.

Before breaking down these proposals, it is worth remembering that our current system is horribly complicated, making compliance costs exorbitant. It is incredibly unfair, extending privileges to some at the expense of others. There is no equality before the taxman.

Genuine tax reform would expand and simplify the tax base by getting rid of the thousands of loopholes to special interest groups. It would lower the top marginal rates and end the double taxation on saving and investment. It should restore some horizontal equity (two people making the same income paying the same taxes). It would also make as many provisions permanent—and predictable—as possible.

Good tax reform would require the federal government to make adjustments in spending, the way states and the District of Columbia operate, so the amount of tax collected more or less covers spending for a given year.

The Simpler Tax Code


The House version goes after a large number of tax exemptions, breaks, credits and deductions that make our code so complicated and unfair. It takes some significant steps to reduce the mortgage interest deduction. It also gets rid of most—with the exception of a $10,000 deduction—of the state and local tax deduction (SALT). Pretty impressive moves considering ending tax deductions is usually where tax reform goes to die.

The House plan doubles the standard deduction, meaning dramatically fewer taxpayers will itemize their taxes.

The Senate plan also doubles the standard deduction. (an estimated 90 percent of filers making under $200K would now claim the standard deduction). It gets rid of SALT entirely, but is more timid on the mortgage interest deductions. Moreover, it preserves many of the tax breaks with which the House dispenses. And rather than making the tax changes permanent, it includes a sunset date of 2025 reverting the standard deduction, the estate tax, the child tax credit, SALT, the pass-through deduction, and individual tax rates to 2017 levels.

Middle Class Tax Cuts


President Trump's intention to give a real tax break to the middle class is counter-productive considering the middle class barely shoulders any of the income tax as it is. The top 10 percent of income earners—households making $133K, not $1 million as most assume—currently pay more than 70 percent of all income tax revenue. The middle quintile pays, on average, 2.6 percent of the federal income tax.

And yet, in both the House and Senate plans the middle class receives the largest tax relief by reducing their marginal tax rates, increasing the child tax credit and doubling the standard deduction. The result is fewer taxpayers would be paying income tax at all, problematic from a small government perspective. It also means a more progressive income tax code than it already is.

The House plan also effectively jacks up the top marginal rate for some high earners by using a 39.6 percent bubble rate on the first $90K earned by single taxpayers making $1 million and married taxpayers making $1.2 million and a 12 percent rate like everyone else. This is a perfect example of Republicans caving in to political pressure and implementing bad policies.
Not that it will stop Democrats from calling it a tax cut for the rich.

Lack of Spending Cuts

Senate and House tax writers have been trying to pour two pounds of sugar into a one-pound bag to comply with reconciliation rules. Budget rules require that tax reform not cost more than $1.5 trillion over ten years and be deficit neutral outside of that time window. Because the $1.5 trillion tax reform is scored on a static basis and assuming that many current tax breaks and spending provision will sunset in a few years, the Senate has much more room than it seems. A little economic growth could go a long way (though far from going all the way) to help pay for this. This still imposes a real budget constraint on the tax writers.

They could, of course, have made their lives much easier by cutting government spending. But they refuse. Our current public debt is $14.6 trillion or 78 percent of our GDP and moving at a pace to be 102 percent of GDP by 2033 according to CBO. This massive debt, which will be paid for in higher taxes and slower growth by future generations, was apparently not enough to convince them to be fiscally responsible.

As a result, lawmakers rely heavily on revenue raisers (some good, like the elimination of SALT, and some bad, like base erosion provisions or taxing endowments of private universities) and budget gimmicks (like sunsetting dozens of provisions that will likely be extended in 2025). It is fiscally irresponsible and doesn't address the most important aspects of tax reform: simplicity, transparency and stability.

Cutting the Corporate Tax Rate

Both plans cut the corporate income tax rate from its current 35 percent level to 20 percent. The Senate version implements the cut in 2019, the House version in 2018. Both have the good sense to make the change permanent. This is the most pro-growth/wage change.
This is a measure worth passing to make the country's tax environment more competitive.

Two questions I most often get are: Will tax reform be considered before the 2018 elections, and are either of the plans worth supporting? The honest answer to both questions is I don't know.

This is no libertarian tax reform. Far from it. Many aspects of either bill are awful (lack of fiscal responsibility, increased progressivity, enhanced child tax credit, sunset provisions just to name a few). But there are also provisions I really like, the corporate tax cuts, the elimination of SALT and other loophole terminations. Plus, it will be pro-growth (how much is the question) and certainly beats the alternative.

Not a ringing endorsement, but that's all I've got.

Onward and upward,
airforce

Posts: 17543 | From: Tulsa | Registered: Jan 2002  | Report this post to a Moderator
ConSigCor
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"Here's What's In It": Goldman Explains All You Need To Know About The Current State Of Tax Reform

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"The time for war has not yet come, but it will come and that soon, and when it does come, my advice is to draw the sword and throw away the scabbard." Gen. T.J. Jackson, March 1861

Posts: 15546 | From: A 059 Btn 16 FF MSC | Registered: Oct 2001  | Report this post to a Moderator
   

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