Tag Archives: tax reform

The Divided States of America: Who’s at Fault?

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Frontline’s two part series, “The Divided States of America” makes the case that the divisive and hyper-partisan political atmosphere of the past eight years was caused primarily by the racially tinged reaction of the extremist Tea Party to the progressive policies of a forward looking, if inexperienced, black president.

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I think that Frontline has missed the most fundamental reasons for our current malaise, namely that:

  • Slow economic growth since the end of the Great Recession in June 2009 has caused great angst and resentment amongst middle-income, and especially blue-collar, workers who have stagnant incomes when they observe all around them the elite professional, managerial and financial classes who are doing so well.
  • Self-righteous attitude of progressives who refuse to accept that conservatives have legitimate, and maybe even superior, points of view on various issues.

For example:

  • National Debt. The public debt (on which we pay interest) is now 76% of GDP, the highest since the end of WWII, and is projected by the Congressional Budget Office to keep steadily getting worse without a change in policy. Right now, with ultra-low interest rates, our $14 trillion debt is essentially “free” money. But what is going to happen when interest rates go back up to more normal levels? It could easily be a new fiscal crisis, much worse than the financial crisis of 2008.
  • Inequality. Inequality has risen somewhat in recent years but slow growth is the real problem. What is especially lacking is new business investment to increase labor productivity. The best way to fix this is with tax reform (lower tax rates paid for by shrinking deductions) and a reduction in government regulation. But this would mean more “trickle down” economics. Horrors!
  • Improving Obamacare. The Affordable Care Act has increased access to healthcare but has done nothing to control costs. Most developed countries control the cost of healthcare with a “single payer,” government run monopoly. But this is anathema to many Americans who neither want to give up personal choice nor want to forgo the innovation which a free-market consumer-driven healthcare system provides.

Conclusion. The driver of our currently divisive political climate is a deep chasm between the fundamental beliefs of the two different sides. How can this deep division be overcome short of a new crisis which pulls both sides together?  A very difficult question.

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What Will Trump Do?

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I did not vote for Donald Trump because of his often crude remarks and sleazy behavior. But I am now cautiously optimistic about the prospects for his presidency based on the quality of his nominees for important government posts.  Like many of his voters, I “take him seriously but not literally.”

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Here is what I think he will do:

  • Economic Policy. He will try to speed up economic growth, well above the average 2.1% annual GDP growth of the past 7½ years. This can be accomplished with tax reform (lowering tax rates paid for by shrinking deductions), regulatory reform (including paring back Dodd-Frank and the ACA), immigration reform and tougher trade policies. Faster growth benefits the whole country and especially the blue-collar workers who voted for him.
  • Improving life in the inner cities. K-12 education is a disaster in many inner cities and Betsy DeVos will be a reformer in the Education Department. Ben Carson grew up in public housing and is an excellent choice for HUD.
  • Foreign Policy. Mr. Trump wants changes from China on currency and trade practices. He also wants more cooperation from Russia in fighting terrorism. He wants our NATO partners to bear a bigger share of their own defense. His Secretary of State designee, Rex Tillerson, supports arming Ukraine against Russia and also supports the TPP trade agreement with Asia. This all sounds good to me.
  • Fiscal Policy. My biggest concern at this point is our national debt, now 76% of GDP (for the public part on which we pay interest) which is historically high and steadily getting worse. The House Republicans are serious about shrinking deficit spending and hopefully Mr. Trump will support their efforts.

Conclusion. Donald Trump has a highly unconventional (but very effective) style of communication. If it leads to progress in addressing our biggest problems as above, then he’ll have a very successful presidency.

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Trump Could Become a Transformational President

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According to the historian John Steele Gordon, “Trump May Herald a New Political Order,” there have been just four transformational presidencies so far in U.S. history:

  • Andrew Jackson in 1828 moved the locus of political power sharply down the socioeconomic scale.

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  • Abraham Lincoln in 1860 preserved the Union, freed the slaves and turned the South into essentially a third world country for the next 100 years.
  • William McKinley in 1896 ushered in an era of almost unbroken Republican dominance which lasted until the 1930s.
  • Franklin Roosevelt in 1932 who overcame the Great Depression and greatly expanded the reach and power of the federal government.

Ronald Reagan in 1980, constrained by a solidly Democratic House, was less transformational than the four presidents above, even though he ushered in the era of Great Moderation which lasted until the Great Recession hit in 2007-2008.
Barack Obama in 2008 took office with strong Democratic majorities.  However the last eight years have proved a disaster for the Democratic Party.  They lost the House in 2010, the Senate in 2014, and Republicans now control most governorships and state legislatures as well.
Now consider Donald Trump’s strong political position as he takes office:

  • The Republicans hold a big majority in the House and a small majority in the Senate. And ten Democratic Senators in states carried by Mr. Trump are up for re-election in 2018.
  • He was elected to change the self-serving ways of Washington and owes little to the political establishment.
  • His cabinet picks, many with excellent qualifications, signal profound changes in government policy, especially lower tax rates and a regulatory environment more friendly to business.

Conclusion. Mr. Trump has excellent prospects for achieving faster economic growth and therefore rising incomes for the blue-collar workers who provided his victory margin. If he can also improve life in the inner cities, as he has promised to do, he and the Republican Party will be unbeatable for many years to come.

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The Trump Trade Agenda

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Trumponomics is taking shape: tax reform, regulatory reform and infrastructure spending.  The likelihood of President-elect Donald Trump and Congress working together on these major initiatives is so great that the dollar and the U.S. stock market are surging. This complicates the Trump trade agenda:

  • The yuan is now being driven down against the dollar.  China will face even more pressure to devalue in the year ahead as the U.S. Federal Reserve raises interest rates and the dollar continues to strengthen. Stronger U.S. growth will also increase the demand for Chinese goods, making our trade deficit with China even greater.

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  • One way to increase U.S. manufacturing employment is to figure out how to train workers for the 334,000 manufacturing jobs which are now vacant.  Wages are stagnant is America today not because we have too few taxes and restrictions on international trade but because we have too many taxes and restrictions on domestic trade here at home.
  • When the U.S. entered the North American Free Trade Agreement, Mexican taxes on U.S. imports fell from 12.5% to zero, Canadian taxes fell from 4.2% to zero and U.S. taxes on Mexican and Canadian imports fell from 2.7% to zero.  In other words, NAFTA improved America’s competitive position.
  • Pro-growth economic policies are the key to higher wages.  From 1900 to 2000 employment in agriculture declined from 41% of the workforce to 1.9%. But the number of jobs in the country rose fivefold and average real income rose eightfold. All because of pro-growth economic policy. The same thing can happen again with respect to manufacturing employment in the 21st century.
  • Eliminating direct currency manipulation and special interest provisions in existing trade agreements will benefit American workers, raise world living standards and reinforce the impact of Mr. Trump’s primary recovery program.

Conclusion. Restricting international trade won’t bring back high-paying manufacturing jobs. But faster overall economic growth will create more jobs and better paying jobs as businesses have to compete more vigorously for qualified employees.

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Trumponomics Is Taking Shape

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As the readers of this blog well know, I am very concerned about the fiscal and economic direction our country has been taking in recent years. I voted for Hillary Clinton in the 2016 presidential election because of Donald Trump’s crude and sleazy behavior.  However we need basic change in the U.S. and Mr. Trump is clearly a change agent.
As the new Trump administration begins to take shape, here is what I see happening:

  • Treasury Secretary designee, Steven Mnuchin, says that tax cuts for both upper-income and middle class taxpayers will be offset by “less deductions that pay for it.”  Revenue neutral tax rate cuts will increase both consumer and investment spending, without increasing our debt, and will give the economy a huge boost.
  • Health and Human Services Secretary designee, Rep Tom Price, is an expert on health-care and wants to replace the Affordable Care Act with a new healthcare program which provides more consumer choice at a much lower cost.

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  • The Great Rebuilding.  Infrastructure investment is needed but it should be accomplished with a lower corporate tax rate and repatriated profits of multinational corporations to avoid increasing the deficit.
  • Holdback on excessive fiscal stimulus.  With the unemployment rate down to 4.6%, a dollar which has already appreciated 40% since 2011, and tax cuts on the way, inflation and higher interest rates are in the offing. Let’s not overdo it.

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  • Living on borrowed time.  As shown in the above chart, interest rates are very, very low and are likely to rise significantly in the near future. When this happens, our massive public debt (on which we pay interest) of 76% of GDP will become very expensive to service. Ouch!

 

Conclusion.  One can see a Trump agenda emerging which has the potential to be very successful if it is coupled with overall spending restraint.

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What to look for in President Trump’s First Budget

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As a new administration prepares to take office in January, one of the key indicators of President Trump’s approach to government will be his first budget. This is especially true since the Republican controlled Congress is likely to take a Republican President’s budget seriously.

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One of our nation’s chief fiscal watchdogs, the Concord Coalition, has summarized the most important things to look for:

  • What is the overall fiscal target? President Obama’s recent budgets have aimed at stabilizing the debt as a share of the economy. House Republicans have aimed for a more ambitious goal of balancing the budget within ten years, gradually reducing the debt as a share of the economy. What path will Mr. Trump recommend?
  • What specific tax cuts will be proposed and what are the likely revenue effects? During the campaign Mr. Trump proposed tax cuts amounting to $5.9 trillion in revenue loss over ten years. Even with dynamic scoring, taking the stimulatory effects of his tax cuts into effect, the revenue loss is still $3.9 trillion over ten years. Such huge revenue losses will make our debt much worse than it is already and won’t be approved by Congress.
  • What will the budget recommend for the federal debt limit? Currently the debt limit is suspended until March 16, 2017 when it will return at whatever level it is on that date. Congress will then have several months to reset it. Whatever the President recommends will send a strong signal, positive or negative, to the financial markets.
  • What economic growth rates will the budget assume?   GDP growth has averaged 2.6% for the past 30 years. Any predicted long term growth rate higher than this will lack credibility without strong justification.

Conclusion. Mr. Trump has the opportunity to institute the change in course which so many Americans would like to see. His first budget will set the tone and provide an important clue as to whether or not he is serious about doing this.

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Can the Economy Grow Faster without Increasing Our Debt?

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As I have been saying over and over on this blog for several years, America’s two major fiscal and economic problems are:

  • Slow Economic Growth, averaging just 2% since the end of the Great Recession in June 2009.
  • Massive Debt. Our public debt, on which we pay interest, is now $14 trillion or 76% of GDP, the highest it has been since the end of WWII.

President-elect Donald Trump campaigned on the issue of slow economic growth and will surely work with the Republican Congress to institute various tax and regulatory reform measures needed to speed up growth.

capture15But during the campaign Mr. Trump also introduced a specific tax reform plan which would lead to an estimated $4.4 trillion in new debt over the next ten years. Such a very large amount of new debt is highly undesirable and hopefully will be rejected by Congress.
In fact, as described by the Tax Foundation, there are some very good ways to use tax reform to improve growth without increasing debt. Fox example:

  • Allowing the full and immediate expensing of capital investments will grow the economy by 5.4% at a cost of $881 billion over ten years.
  • Lowering the top corporate tax rate to 20% will grow the economy by 3.3% at a cost of $718 billion over ten years.
  • Eliminating all itemized deductions except the charitable and mortgage interest deductions will slow economic growth by only .4% and increase tax revenue by $2,268 billion over ten years.

Conclusion. Just these three specific tax reform measures would grow the economy by about 8% while producing $600 billion in new tax revenue over a ten year period.  There are other ways as well of achieving similar growth and revenue levels.  The point is that the changes our country needs can be accomplished without increasing the national debt and perhaps even reducing it instead.

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What Trumponomics Will Look Like (Hopefully!)

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Donald Trump won the presidential election because of his strong support from blue-collar workers who feel aggrieved by the U.S. economic system. Many have lost their jobs in recent years due to technology and globalization.  Many others have suffered wage stagnation.  Helping this large group of voters is surely Mr. Trump’s primary mandate from the election.

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The best way to do this is to make the economy grow faster by implementing smart policies such as:

  • Corporate tax reform. Reducing the top rate from 35% to about 20% will make the U.S. competitive with other developed countries and induce American multinational companies to bring their overseas profits back home for reinvestment. This will create more jobs and better paying jobs. This can be paid for by eliminating various deductions.
  • Business tax reform. Allow full expensing of capital investments, paid for by eliminating the deductibility of interest payments. This will strongly encourage more business investment and therefore increase worker productivity.
  • Individual tax reform. Lower marginal tax rates across the board by 10%, paid for by eliminating most deductions. This would give an automatic increase in pay to the two-thirds of taxpayers who do not itemize deductions and, since most of the pay increase would be spent, grow the economy by stimulating demand.
  • Regulatory reform. Much can be done to alleviate the regulatory burden on business, see here and here.
  • International trade rules. “Tearing up NAFTA” would be a huge mistake because the U.S. exports $600 billion annually to Canada and Mexico with a trade deficit of only $40 billion. But NAFTA can be updated with side agreements to address concerns of fairness. Expand retraining programs for workers who lose their jobs to foreign competition.
  • Immigration reform. Secure our southern border and deport the illegal immigrants who are lawbreakers as Mr. Trump wants to do. Then give guest worker visas to law-abiding employees of legitimate businesses and use eVerify to enforce them.

Conclusion. Changes such as these will give a big boost to the economy and therefore create many new jobs and better paying jobs.

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Bush Failures Led to Obama and Obama Failures Led to Trump

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As I have previously stated, I voted for Hillary Clinton because Donald Trump is so crude and sleazy even though our country will now greatly benefit from the change which Mr. Trump represents.  This is the way the political process often works.

capture79 Consider that after eight years of George Bush we had:

  • Ongoing war in Iraq and Afghanistan, of which the Iraq war was an unnecessary mistake.
  • $2.5 trillion of additional debt, even after Mr. Bush started out with a budget surplus, compliments of Bill Clinton.
  • An expensive new Medicare Part D prescription drug plan which just makes overall Medicare even less affordable than it already is.
  • The Financial Crisis of 2007-2008 which the Bush Administration could have seen coming if they had been more vigilant.

 

Under such political circumstances, the 2008 election of the Democratic nominee, Barack Obama, over the Republican nominee, John McCain, was almost inevitable. But then in the next eight years we have experienced:

  • Slow economic growth averaging only 2% per year, ever since the end of the Great Recession in June 2009. The unemployment rate has fallen to 4.9% but there is still a lot of slack in the labor market which holds wages down. This is the main reason for the huge support Mr. Trump had from white blue-collar workers in the election.
  • Massive debt, now 76% of GDP (for the public debt on which we pay interest), the highest since right after WWII and double the debt in January 2009 when Mr. Obama entered office. Such a high debt level means greatly increased interest payments as soon as interest rates go up which they are likely to do anytime. The high annual deficits contributing to the debt mean little budget flexibility for new programs.

Conclusion. Democrats like to say that slow economic growth is “the new normal” which can only be overturned with budget busting new fiscal stimulus. This is a pessimistic point of view which refuses to consider other alternatives.  This is what led to Ms. Clinton’s defeat on November 8.

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Disruption Involves Taking Chances

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I am a fiscal conservative (I want to balance the budget) and a social moderate. I voted for Hillary Clinton for president because Donald Trump is a sleazy person and has such a volatile temperament.  But I’m also in favor of making big changes and Mr. Trump will certainly do this.

capture79As the Economist points out, “his voters took Mr. Trump seriously but not literally, even as his critics took him literally but not seriously.”  The Economist goes on to point out some of the risks involved in making the kinds of changes Mr. Trump is talking about:

    • If Obamacare is repealed, 20 million Americans will lose their health insurance. Yes, but it’s not going to happen this way. Obamacare will end up being modified and improved, not abolished.
  • His tax cuts would chiefly benefit the rich and would greatly increase our national debt. Yes, but the House of Representatives has a much better plan to do this and it is Congress, not Mr. Trump, which will develop a detailed plan.
  • Even if he does not actually deport illegal immigrants, he will foment the divisive politics of race. The illegal immigration problem needs to be solved and Mr. Trump is likely to get this done, with or without a wall.
  • Mr. Trump has demanded trade concessions from China and NAFTA. If he causes a trade war, the fragile world economy could tip into a recession. Blue collar workers, his strongest base of support, have had stagnant incomes for years and deserve some help. If he can increase our exports, blue collar workers will benefit.
  • He wants to reverse the Paris agreement on climate change which would harm the planet and undermine America as a negotiating partner. Global warming is real but the Paris accord does essentially nothing to slow it down. Increased coal use in China and India will more than negate what the U.S. and Western Europe are doing to cut back on fossil fuels.
  • Mr. Trump has demanded that other countries pay more towards their security or he will walk away. NATO members should be doing more on their own and if he can prod them to do this, then NATO will be stronger as a result.

 

Conclusion. Mr. Trump’s expressed views should be interpreted as initial bargaining positions. They are likely to have the effect of leading to progress on many serious problems which need to be addressed.  The risks involved in the negotiation process are worth taking

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