Voodoo Trumponomics
13/5/17 11:40![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
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talkpoliticsOne of Reagan's famous quotes is that even Einsten couldn't fill his tax declaration on his own and was driven crazy by the complicated tax system - which probably explains his "mad scientist" haircut. Now the guy who often likes to present himself as Reagan v.2.0, Trump has taken it upon himself to revamp the horribly complex federal tax code, which, along with all relevant addenda, rules and regulations, may or may not exceed 70,000 pages in total. What a joy it must be to see the contrast with Trump's reform plan which he presented in April - it's just one page long, people! Come on!
That page includes a lot of ambition. And fundamental changes too, involving both main domains, the taxing of physical persons and the business. The former will be handed just three levels of income tax, as opposed to the current seven. And also a doubling of the tax-exempt minimum, and the elimination of some types of tax and tax cuts that complicate and destroy the declaration process. As for the business, the biggest tax cut is that the corporate tax should shrink from 35% to 15%, and the taxation principle will be such that US corporations would stop holding trillions of dollars in countries with a more favourable tax regime (various estimates tend to assess the total amount between 1.2 and 2.6 trillion dollars).
Here's the plan in more detail:
- Cutting corporate tax from 35% to 15%.
- The tax rate for physical persons will have 3 levels instead of 7: 10%, 25% and 35%. So the highest tax will be decreased by nearly 5%. Right now it's still unclear where the three categories of income will start and end.
- Right now, physical persons can deduct 6350 dollars from their taxable income, and married couples 12,700 dollars. Trump's plan would double these amounts.
- Removing the alternative minimum tax affecting people with high income who do lots of deductions and use tax cuts. That tax had personally cost Trump about 31 million dollars back in 2005.
- Removing the inheritance tax.
- Cutting the capital profit tax from 23.8% to 20%.
- Removing many tax cuts, but keeping those from mortgages and charity.
From a first reading, this administration may seem to be moving in a good direction. i mean, who wouldn't enjoy some simplification and reduction of the high tax rates (corporate tax in the US is the highest among the OECD countries, although due to the many tax cuts and loopholes, few companies actually pay the nominal tax rate, and last year the real tax rate for companies included in the S&P index was about 29%). But here's where the big questions begin. The most important one is, how these measures would be funded if implemented in their current version, without bringing an explosion of debt and deficit. In the meantime, the critics haven't missed to point out that contrary to his promises about stimulating the middle class, the bulk of these tax cuts are aimed at enriching the wealthiest, including Trump himself (what a surprise!) by allowing them to save millions of dollars.
In any case, the plan looks more like an opening move in a long game that's only going to surface in the next few weeks and months from under the deep waters of Congress that have managed to sink many an attempt for reform of the tax code. It was Reagan who proved that a tax reform is still possible - only, he did it after striking a deal with the Democrats. And Trump's confrontational style, and his initial fiasco with the health-care reform has shown that he'll hardly be able to work even with his own party, let alone with the opposition. So we can't expect a Reagan type of bipartisan success. We live in different times now, and the divisions in US politics are just too deep.
If there's one aspect of the US tax law that almost everyone agrees is broken, it must be corporate taxation. The current system is such that the profit that the US corporations make overseas is not taxed until that profit is returned to the US. And this has led giants like Apple to amassing nearly a quarter of a trillion dollars in their foreign bank accounts.
To put an end to the tax acrobatics that US-dominated multinational companies do to avoid taxation, two things are needed. The first thing is present in Trump's plan, namely switching to a system of territorial taxation, meaning that the tax will be payed where the profit is generated. The second (and harder) thing is that companies should somehow be persuaded to repatriate their profits back into the US. In 2005 for instance, the tax break didn't yield the expected results: about 300 billion dollars were returned to the US, but the money was mostly used for paying dividends and bonuses and buying back stocks, instead of creating jobs and added investments. So the consensus is that a one-time tax is a better solution.
The problem is, the 8.75% tax rate that Congress proposes (or 10% as per Trump's campaign used to propose; there isn't a specific number in Trump's plan now) is considered too low by most experts. Some are proposing a 15% tax rate, which would stimulate companies to refrain from moving their profits offshore, since the gap between the US tax rate and that in other countries would be narrowed.
You know, that's the Laffer curve, which Reagan's finance advisor Arthur Laffer drew on a napkin in 1974. The famous graph illustrates his theory that tax cuts generate enough economic growth to bring additional tax income. It's on display at the National Museum of American History. Years later, George HW Bush called this "voodoo economics". Ironically, it was his son who tried to implement this polucy, and his VP Dick Cheney said Reagan had proved that "deficits don't matter". Now Trump is pulling out the same old recipe, being publicly encouraged by none else but that same Arthur Laffer himself.
"The tax plan will be paid off through economic growth", secretary of finance Stephen Mnuchin keeps repeating like a mantra (he's considered the main architect of this reform). Except, history doesn't seem to support his assertion. Tax cuts during George W Bush's administration was done in 2001 and 2003 - and it didn't bring any economic boom. The same goes for the tax breaks under Obama. There's not a trace of proof that would support Mnuchin's claims about self-regulation. Of course, faster growth would increase incomes. But, as Obama's economics advisor Jared Bernstein says, there's simply no empirical correlation between lowering taxes and economic growth that's both faster and sustainable.
On the other hand, the relation between higher deficit and lower taxes has been repeatedly demonstrated throughout history - especially when the tax cuts are attempted to be compensated through cutting expenses and other sources of income hike, as Trump is proposing. His plan also lacks the import tariffs that the GOP is proposing, which could raise incomes and make the tax changes neutral from a budget standpoint (as the fiscal hawks are proposing).
A calculation by the independent organisation Committee for Responsible Federal Budget indicates that the probably cost of Trump's plan within the next decade would be 5.5. trillion dollars, the estimates varying between 3 and 7 trillion, depending on the details (which of course remain vague at this point). Similar estimates were made by Tax Policy Centre: the US budget would see a 6.2 trillion dollar hole opening up, and the national debt swelling to 20 trillion by 2036. So, even the most elaborate voodoo magic can't conceal the fact that Trump's calculations simply don't work. And his plan is more likely to break the economy than fix anything.
That page includes a lot of ambition. And fundamental changes too, involving both main domains, the taxing of physical persons and the business. The former will be handed just three levels of income tax, as opposed to the current seven. And also a doubling of the tax-exempt minimum, and the elimination of some types of tax and tax cuts that complicate and destroy the declaration process. As for the business, the biggest tax cut is that the corporate tax should shrink from 35% to 15%, and the taxation principle will be such that US corporations would stop holding trillions of dollars in countries with a more favourable tax regime (various estimates tend to assess the total amount between 1.2 and 2.6 trillion dollars).
Here's the plan in more detail:
- Cutting corporate tax from 35% to 15%.
- The tax rate for physical persons will have 3 levels instead of 7: 10%, 25% and 35%. So the highest tax will be decreased by nearly 5%. Right now it's still unclear where the three categories of income will start and end.
- Right now, physical persons can deduct 6350 dollars from their taxable income, and married couples 12,700 dollars. Trump's plan would double these amounts.
- Removing the alternative minimum tax affecting people with high income who do lots of deductions and use tax cuts. That tax had personally cost Trump about 31 million dollars back in 2005.
- Removing the inheritance tax.
- Cutting the capital profit tax from 23.8% to 20%.
- Removing many tax cuts, but keeping those from mortgages and charity.
From a first reading, this administration may seem to be moving in a good direction. i mean, who wouldn't enjoy some simplification and reduction of the high tax rates (corporate tax in the US is the highest among the OECD countries, although due to the many tax cuts and loopholes, few companies actually pay the nominal tax rate, and last year the real tax rate for companies included in the S&P index was about 29%). But here's where the big questions begin. The most important one is, how these measures would be funded if implemented in their current version, without bringing an explosion of debt and deficit. In the meantime, the critics haven't missed to point out that contrary to his promises about stimulating the middle class, the bulk of these tax cuts are aimed at enriching the wealthiest, including Trump himself (what a surprise!) by allowing them to save millions of dollars.
In any case, the plan looks more like an opening move in a long game that's only going to surface in the next few weeks and months from under the deep waters of Congress that have managed to sink many an attempt for reform of the tax code. It was Reagan who proved that a tax reform is still possible - only, he did it after striking a deal with the Democrats. And Trump's confrontational style, and his initial fiasco with the health-care reform has shown that he'll hardly be able to work even with his own party, let alone with the opposition. So we can't expect a Reagan type of bipartisan success. We live in different times now, and the divisions in US politics are just too deep.
If there's one aspect of the US tax law that almost everyone agrees is broken, it must be corporate taxation. The current system is such that the profit that the US corporations make overseas is not taxed until that profit is returned to the US. And this has led giants like Apple to amassing nearly a quarter of a trillion dollars in their foreign bank accounts.
To put an end to the tax acrobatics that US-dominated multinational companies do to avoid taxation, two things are needed. The first thing is present in Trump's plan, namely switching to a system of territorial taxation, meaning that the tax will be payed where the profit is generated. The second (and harder) thing is that companies should somehow be persuaded to repatriate their profits back into the US. In 2005 for instance, the tax break didn't yield the expected results: about 300 billion dollars were returned to the US, but the money was mostly used for paying dividends and bonuses and buying back stocks, instead of creating jobs and added investments. So the consensus is that a one-time tax is a better solution.
The problem is, the 8.75% tax rate that Congress proposes (or 10% as per Trump's campaign used to propose; there isn't a specific number in Trump's plan now) is considered too low by most experts. Some are proposing a 15% tax rate, which would stimulate companies to refrain from moving their profits offshore, since the gap between the US tax rate and that in other countries would be narrowed.
You know, that's the Laffer curve, which Reagan's finance advisor Arthur Laffer drew on a napkin in 1974. The famous graph illustrates his theory that tax cuts generate enough economic growth to bring additional tax income. It's on display at the National Museum of American History. Years later, George HW Bush called this "voodoo economics". Ironically, it was his son who tried to implement this polucy, and his VP Dick Cheney said Reagan had proved that "deficits don't matter". Now Trump is pulling out the same old recipe, being publicly encouraged by none else but that same Arthur Laffer himself.
"The tax plan will be paid off through economic growth", secretary of finance Stephen Mnuchin keeps repeating like a mantra (he's considered the main architect of this reform). Except, history doesn't seem to support his assertion. Tax cuts during George W Bush's administration was done in 2001 and 2003 - and it didn't bring any economic boom. The same goes for the tax breaks under Obama. There's not a trace of proof that would support Mnuchin's claims about self-regulation. Of course, faster growth would increase incomes. But, as Obama's economics advisor Jared Bernstein says, there's simply no empirical correlation between lowering taxes and economic growth that's both faster and sustainable.
On the other hand, the relation between higher deficit and lower taxes has been repeatedly demonstrated throughout history - especially when the tax cuts are attempted to be compensated through cutting expenses and other sources of income hike, as Trump is proposing. His plan also lacks the import tariffs that the GOP is proposing, which could raise incomes and make the tax changes neutral from a budget standpoint (as the fiscal hawks are proposing).
A calculation by the independent organisation Committee for Responsible Federal Budget indicates that the probably cost of Trump's plan within the next decade would be 5.5. trillion dollars, the estimates varying between 3 and 7 trillion, depending on the details (which of course remain vague at this point). Similar estimates were made by Tax Policy Centre: the US budget would see a 6.2 trillion dollar hole opening up, and the national debt swelling to 20 trillion by 2036. So, even the most elaborate voodoo magic can't conceal the fact that Trump's calculations simply don't work. And his plan is more likely to break the economy than fix anything.
(no subject)
Date: 14/5/17 22:35 (UTC)Economists...
I've been speaking with lots of city banker/analysts and financial high-powered types. I opened with the question "What if Gordon Brown hadn't intervened immediately after the financial crash?"
Unlike the Daily Mail, the universal opinion (with no deviation at all) was that Gordon Brown had pretty much saved the world financial markets.
This is from a bunch or really right wing chaps. Who are quite prepared to admit it ten years or so after the event and eight years after they crucified Brown for "causing the problem".
No honour.
I'm sure ten years down the line they will say that they knew what Trump's plans meant all along. But America had voted for Trump.
OxyContin alley is going to have a big wake-up call.
(no subject)
Date: 15/5/17 06:34 (UTC)Besides, there are so many special interests casting their roots deep into the system, that it can't be healed without huge turmoil.