What Are the Good Features in the Republican Tax Bill?

 

I have made very clear in recent posts that one negative feature of the tax bill, increasing national debt by $1 trillion over ten years, greatly outweighs its good features.  For this reason I ask Nebraska Senator Deb Fischer to put the welfare of our country ahead of the demands of her Republican colleagues and vote against the bill.


Nevertheless, the tax bill does have beneficial features and I would like to acknowledge them here.  Major ones are:

  • Lowering the corporate tax rate from 35% to 21% and moving to a territorial system, making us far more internationally competitive and encouraging our multinational corporations to bring their foreign profits back home.
  • Establishing immediate expensing of capital investment, thereby speeding up business investment and increasing economic growth.
  • Reducing itemized deductions for state and local taxes and mortgage interest, but not eliminating them as should be done for much greater revenue savings.
  • Increasing the standard deduction to $12,000/$24,000 (for singles/couples) which will reduce the number of individual taxpayers who itemize deductions from 30% to just 6%. This single feature alone achieves major simplification.
  • Measuring inflation adjustments for income thresholds by the Chained Consumer Price Index (CCPI) rather than the current CPI. CCPI takes consumer behavior into account when computing inflation and will lead to an increase in tax revenue over time.
  • Eliminating the individual mandate for the ACA which will lead to fewer healthy people signing up for health insurance. This begins a process of healthcare cost reform which must continue much further to significantly reduce the cost of American healthcare. Much more later.

Conclusion. The good features in the tax bill do not nearly outweigh the awfulness of adding $1 trillion to our debt over the next ten years. The Republican Party should be ashamed of itself for such poor fiscal and economic stewardship.  What is it thinking?

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The GOP Tax Plan: Bad Economic Policy and Bad Fiscal Policy

 

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.

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Responding to Economic Trends

 

In my most recent posts I have been making the case that

  • 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 debt is 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.

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Which Is Worse: Republican Hypocrisy about Debt or Democratic Complacency about It?

 

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.

Republicans are very good at deploring the debt but quick to forget about it, when it gets in the way of cutting taxes.  Note that:

  • Economic growth is 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.

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Avoiding the Extremes on Either Side

 

Not only is Washington politics already hyper-partisan, but both parties are continuing to move to even greater extremes, see here and here.
Here are two examples of extreme positions now being espoused by major elements of one or the other of the two parties:

  • Single payer healthcare. The failure of the GOP effort to repeal the Affordable Care Act this past summer means that (the goal of) universal healthcare is here to stay. The ACA expands access to healthcare but does nothing to control costs. Single payer, Medicare for All, would control costs but then we end up with socialized medicine. The only way to establish a cost efficient free market healthcare system is to remove, or at least limit, the tax exemption for employer provided care and to set up high deductible catastrophic care supplemented by health savings accounts to pay for routine expenses. This would compel everyone to pay close attention to the cost of their own healthcare.
  • Tax cuts instead of tax reform. Tax reform, i.e. lowering both corporate and individual tax rates, paid for by closing loopholes and shrinking deductions, is an excellent way to speed up economic growth and thereby create more and better paying jobs. But it is imperative to do this in a revenue neutral manner, i.e. without increasing our annual deficits. Our debt (the public part on which we pay interest) now stands at 77% of GDP, the highest it has been since the end of WWII, and is predicted by the Congressional Budget Office to keep getting larger without major changes in public policy.

Conclusion. The U.S. badly needs a more cost efficient healthcare system and a simpler and more efficient tax system. But there are right ways and wrong ways to do both of these things.  Single payer healthcare and (unpaid for) tax rate cuts are the wrong way to proceed.  In each case, no action at all is much better than getting it wrong.

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New Urgency in Deficit and Debt Control

 

The general theme of this blog is major fiscal and economic issues facing the U.S. such as slow economic growth and huge debt. But our currently low unemployment rate of 4.4% and several trends, here and here, suggest that economic growth may already be starting to pick up.
This means that our huge debt, now 77%, for the public part on which we pay interest, the highest it has been since right after WWII, is now one of the very biggest problems facing our country.
Consider:

  • The only practical way to “solve” our debt problem (so to speak) is for each year’s annual deficit to be less than economic growth for that year. When this happens, then the debt will decrease as a percentage of GDP. If this pattern were to hold year after year, then debt would continue to shrink. This is exactly what happened from 1946 until about 1980 but since then the pattern has reversed and the debt has increased. It has grown especially fast since the financial crisis in 2008 (see chart).
  • The Fiscal Year 2017 deficit is $700 billion out of a total GDP of $20 trillion, which computes to 3.5% of GDP, well above the 2% annual growth of GDP for the 2017 FY. This means that our debt got worse in 2017.
  • Congress has already approved $15 billion in disaster relief for Hurricane Harvey. Now the White House is asking for $29 billion more ($12.8 billion for new disaster relief, especially for Puerto Rico, and $16 billion for the National Flood Insurance Program).  Congress has also approved a big increase in the Defense Budget, to $700 billion, for the 2018 FY.
  • Congress will soon be approving a budget for 2018 and then start working on a tax reform package. Given the likely increases in both military spending and disaster relief described above, it is now even more important for the new budget to show overall spending restraint and for the tax reform package to be revenue neutral.

Conclusion. Let’s hope that Congress gets the message about the new urgency of our debt problem and acts accordingly!

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Fundamental Principle for Tax Reform II. What to Avoid

 

In my last post I made the case that the two fundamental principles for effective tax reform are:

  • Faster economic growth, to create more jobs and bigger pay raises.
  • Revenue neutrality, since more debt at this time is just too risky.

And then I went on to suggest the specific changes in the tax code which would achieve these goals:

  • Reducing the corporate tax rate to approximately 20%.
  • Full expensing for business investment replacing depreciation spread out over many years.
  • Simplification of rules for individuals such as fewer tax rates and fewer credits.
  • Achieving revenue neutrality by eliminating as many deductions as necessary to pay for the above tax rate cuts.

There are different ways to accomplish all this and I recently described one attractive plan put together by the Tax Foundation. The Republican Congressional Leadership (Big Six) has proposed a different plan which has been analyzed by the nonpartisan Committee for a Responsible Federal Budget.  Unfortunately CRFB concludes that this plan will cost $2.2 trillion over ten years in lost revenue.  But it could be modified in the following ways to become revenue neutral:

  • The mortgage interest deduction is maintained but limited to one dwelling and $500,000, down from the current limit of two homes and $1 million.
  • The tax exemption for employer provided health insurance is limited. This not only increases tax revenue but also forces the 150 million Americans who receive health insurance from their employer to take an active role in holding down the cost of healthcare.
  • Drop the proposal of establishing a maximum “pass through” rate of 25% for business owners. Any such proposal would be subject to wide spread abuse. Businesses would be benefitting from the full expensing provision above and their owners should pay taxes at the same rates as everyone else.
  • Keep the estate tax until annual deficits are greatly reduced. It only brings in $20 billion per year but every little bit helps.

Conclusion. These common sense changes in the Big Six plan would make it revenue neutral and still capable of achieving a significant boost to the economy.

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