I want to emphasize as strongly as possible that cutting the corporate tax rate from 35% to 20% is a very good idea. It makes the U.S. much more competitive with other developed countries and thereby encourages our multinational companies to bring their foreign profits back home for reinvestment in the U.S. It will also encourage international companies from other countries to set up shop here and thereby contribute to more jobs and better paying jobs in the U.S.
As I pointed out in my last post, the tax plan needs to be revenue neutral to be beneficial. Very unfortunately, the current plan adds $1 trillion to our already out-of-control debt over the next ten years. Furthermore, our currently hot economy (3% growth for two quarters in a row) is likely to overheat from an artificial stimulus of $1 trillion. This will cause inflation to speedup more quickly and force the Federal Reserve to raise interest rates precipitously to head it off. This will lead to much higher interest payments on our debt which, in turn, will lead to a new and much worse fiscal crisis in the relatively near future.
I live in Omaha and most of my blog readers likewise live in Nebraska. The Republicans hold a 52-48 majority in the Senate. One Republican Senator, Bob Corker, from Tennessee, has already announced his opposition to the Tax Plan (now in Conference Committee) because he “will not vote to add even one more cent to the deficit.” Thus the Republicans will not be able to pass this atrocious tax bill if they lose even two more votes (fifty votes needed with the VP able to break a tie).
If this awful legislation does become law, and Nebraska Senators Deb Fischer and Ben Sasse vote for it, we will be justified in holding each of them personally responsible.
Conclusion. The GOP is on the verge of making a very bad mistake. The party with a reputation for fiscal responsibility is on the verge of throwing it away for what will turn out to be a very short term gain.
It is a very good idea to cut the top corporate tax rate to 20% or so from its current 35% level. This will make the U.S. competitive with other developed countries and encourage our multinational companies to bring their foreign profits back home for reinvestment in the U.S. It will also encourage other foreign companies to set up shop in the U.S.
My last post, however, strongly criticizes the current GOP tax plan, now in Conference Committee, because it will add $1 trillion to our already huge debt:
Current national debt, at 77% of GDP (for the public part on which we pay interest) is the highest it has been since right after WWII, and is already predicted by CBO to keep getting worse, without major changes in current policy. When interest rates eventually return to more normal and higher levels, interest payments on the debt will skyrocket. And this will continue indefinitely, eventually leading to a new fiscal crisis, much worse than the Financial Crisis of 2008.
This means that the GOP tax plan, by adding an additional $1 trillion to our debt, is terrible fiscal policy. But the situation is even worse than this. It is also bad economic policy:
Economic growth is finally becoming robust. We now have had two quarters in a row of 3% growth. In 2015 median household income grew by 5.2% with another 3.2% added in 2016. Blue collar wages are beginning to take off (see chart). The overall unemployment rate has dropped to 4.1%. Even the unemployment rate for Americans age 25 and older, without a high school diploma, has dropped to 5.2% (see second chart).
Conclusion. The last thing our economy needs right now is the artificial stimulus caused by a deficit-financed tax cut. It is likely to overheat an already hot economy and thereby ignite inflation which will force the Federal Reserve to raise interest rates much faster than would otherwise be necessary.
The House and Senate have now each passed their own versions of tax reform and a conference will come up with a single version acceptable to both legislative chambers. Each of the individual bills has been scored to add $1 trillion to the national debt over a ten year period and so the final bill will probably have the same feature. This is a badge of dishonor on the controlling Republican Congress for the following reasons:
Yes, economic growth at 2.1% of GDP since the end of the Great Recession is too slow and has caused stagnant wages for millions of middle- and lower-income workers. Even though the unemployment rate has now dropped to 4.1% and the economy has grown at a rate of 3% for the past two quarters, there is still much labor slack to make up for.
Yes, the corporate tax rate is too high and encourages multinational companies to invest overseas. Immediate expensing for new business investment would also speed up growth and thereby create new jobs and higher wages.
Revenue neutral tax reform is “easily” accomplished by “simply” offsetting all tax rate cuts by closing loopholes and shrinking deductions by an equal amount. Since two thirds of taxpayers do not itemize deductions, it is primarily the higher income taxpayers who benefit from tax deductions and they can afford to pay higher taxes.
Current national debt, at 77% of GDP (for the public debt on which we pay interest), is the highest it has been since right after WWII, and is already predicted by the CBO to steadily keep getting worse. When interest rates eventually return to more normal and higher levels, interest payments on the debt will soar. And this will continue indefinitely, eventually leading to a new fiscal crisis, much worse than the Financial Crisis of 2008.
The GOP tax plan should be killed. Although a revenue-neutral tax plan could be put together and would be beneficial, the current plan makes our debt much worse and should be killed. We simply must make shrinking the debt a very high priority and not be distracted from getting this done.
The House and Senate have now each passed their own similar tax bills and a conference will come up with a single unified plan. Each of the individual bills has been scored to add $1 trillion to the national debt over a ten year period and so the final plan will almost surely have this same feature.
With our public (on which interest is paid) debt now 77% of GDP, the highest since right after WWII, and already growing rapidly, this is an extremely unattractive, and even dangerous, feature of the tax plan.
One of our most cherished principles in the U.S. is “liberty and justice for all.” But consider the normally perceived philosophical differences between the two political parties:
The Republicans are the party of liberty concentrating on providing maximum opportunity for people to succeed in life by realizing their full potential. This means fostering strong economic growth in order to have lots of opportunities for self-betterment. It also means keeping government at all levels as lean and efficient as possible, so as to minimize interference with private initiative. Excessive public debt is a particular anathema by creating a huge public burden, especially on future generations.
The Democrats are the party of justice concentrating on helping to provide the less fortunate members of society with the necessities of life by means of public support programs. This also means working to oppose all forms of prejudicial behavior based on race, gender, sexual orientation, etc. In addition it means trying to alleviate the inevitable income inequalities which arise in a free and dynamic society like ours, primarily with redistribution of tax revenues.
Conclusion. Both parties have fundamentally important principles. They gain and keep adherents by fighting for what they believe in. If the national Republican Party becomes lackadaisical about our huge national debt, as it appears to be right now, it risks losing its reputation for fiscal responsibility. This will do it great damage.
The American economy is in basically good shape with a low unemployment rate of 4.2% and the likelihood of somewhat faster growth in the near future.
Income inequality and poverty are real problems, see here and here, but there are reasonable and effective ways to address them.
Rapidly accumulating debtis by far our most critical unsolved problem which is all the more frightening because our polarized political system does not seem capable of addressing it.
The Bureau of Labor Statistics has just released its projections of what the U.S. economy will look like in 2026.
The highlights are:
More dominated by the service sector amid the continuing erosion of manufacturing jobs (see two charts below).
More polarized in both earnings and geography (see top and bottom charts).
More tilted towards jobs which require at least a bachelor’s degree (see bottom chart).
The BLS report has several ramifications for public policy as follows:
Improved educational outcomes are needed all along the line: K-12 basic and vocational, training programs for the many skilled jobs going begging and also more low-cost college programs.
More low-skill immigrants, not fewer, are needed to take on the expanding number of low-wage jobs, such as caring for the growing numbers of elderly, which Americans are not willing to do.
Conclusion. These economic trends towards more earnings and geographical polarization could easily make our current political polarization even worse than it already is. This means it is all the more important to make sure that we keep speeding up economic growth, better address income inequality and poverty and get our gargantuan debt problem under control.
My recent posts about the American Idea have argued that our country has a great future before it. We have a strong and prosperous economy and are the world’s leading innovator. Furthermore there are clear cut and effective ways to address the income inequality and poverty which hold back many Americans from fully sharing the benefits of our remarkably successful society.
But there is one huge problem our political system is ignoring which will lead to a major crisis if left unattended much longer.
I am referring, of course, to our gargantuan:
National Debt, now sitting at 77% of GDP (for the public part on which we pay interest), the largest it has been since the end of WWII. It is predicted by the Congressional Budget Office to keep steadily getting worse without major changes in current policy. Right now all of this debt is essentially “free money” because interest rates are so low.
Economic growthis created by tax cuts but only 10-20% of the lost revenue from tax cuts is offset by new growth.
Democrats, on the other hand, don’t take the debt seriously, except when arguing against Republican tax cuts. Debt deniers claim that the risk of government overspending is inflation, not bankruptcy. What they don’t understand is that
Interest rates will return to more normal (and much higher) historical levels eventually and, when this happens, interest payments on the debt will skyrocket by hundreds of billions of dollars every year. This will crowd out all sorts of spending on popular domestic programs. It is likely to lead to a new fiscal crisis, much worse than the Financial Crisis of 2008.
Conclusion. For all of our nation’s great strengths, we are in a very serious fiscal pickle, with no clear cut path of orderly resolution. Realistically our debt problem cannot be wound down without committed Presidential leadership and this is unlikely to happen anytime soon.
My last post noted that with our unemployment rate down to 4.2% and with median household income having increased by 3.2% in 2016, the emphasis now should be totally directed to addressing our number one long term problem:
Massive national debt. With a deficit of $668 billion for Fiscal Year 2017, our debt now stands at 77% of GDP (for the public part on which we pay interest), the highest it has been since the end of WWII. It is predicted by the Congressional Budget Office to go much higher without significant changes in current policy.
Obviously our annual deficits are way too large and we need to shrink them dramatically. One way to start doing this is to speed up economic growth which will increase tax revenue especially by creating more jobs and better paying jobs. Faster economic growth is quite feasible and this is one of the main goals of tax reform, now being considered by Congress. But it needs to increase growth without increasing the deficit which is entirely doable.
But there is another big reason for revenue neutral tax reform as well. The dollar has depreciated by 10% in 2017 while the stock market has increased by 13%. The S&P price-earnings ratio has risen to 30 at present which is way above average. All of this means that we are in a loose money financial bubble. For Congress to make our annual deficits worse than they already are, with deficit increasing tax reform, would make this bubble even bigger and therefore be highly irresponsible.
Conclusion. When interest rates return to much higher normal levels, as they inevitably will, interest payments on our debt will grow dramatically and cause a huge budget crunch. If ignored, this situation will eventually lead to a new fiscal crisis, much worse than the Financial Crisis of 2008.