December 26, 2017--Merry Jack

"At the risk of spoiling your holiday, I thought to give you a call to wish you a merry whatever."

"To you as well," I said to Jack, "In fact I was thinking about you last week as your president and a very wimped-out Republican Congress passed that so-called tax reform bill."

I heard Jack trying to suppress a laugh. "'So called?' There are all sorts of reforms in it but not ones you like, so instead of acknowledging that you make fun of it. You don't consider the cut in corporate taxes to be a reform? If not, I don't see what you would you would see as a reform."

"Genuine and permanent cuts in taxes for the middle class, for example. This version is tipped way to the benefit of wealthy people like Trump himself who have large real estate assets and tens and hundreds of millions to pass along to their children when they die."

"I read what you wrote last week about the doubling of the standard deduction and raising the child tax credit," Jack said, "Even you agreed that it could so help lower-income people that it could turn out to be a political benefit to Republicans come the midterm elections next year. And of course 2020."

"It's true that I did speculate about that, but all the independent analyses of the bloated, nearly 1,000-page bill is that it's not only full of loopholes and carve-outs for special interests but whatever cuts middle income people will see, after a few years, will be ratcheted back and they will have to deal with tax increases."

"What did you call this? 'Speculation.' What's that worth? Speculation is another way of referring to your opinion. You love lecturing people about that. You're the one who rails about confusing facts with opinions. But now you don't have facts to back up your case but just opinions. One thing though I'll grant you is that no one knows for sure the full effect of something this huge. Especially what you and your friends mockingly say about the consequences of trickle-down. You know your history--the Reagan tax cuts rescued a very weak economy that he inherited from Jimmy Carter. There was a spurt of growth and a dramatic reduction in inflation."

"And, pay attention to this, a tripling of the national debt. Like the current bill, it wasn't paid for. The Trump tax bill will add up to $2.0 trillion to the debt. Ditto for George W. Bush's tax cut. It led to the Great Recession and a doubling of the debt. You guys call us tax-and-spend liberals. I call you tax-cut and spend conservatives. At least with someone like Bill Clinton and, for that matter, your pariah, Barack Obama--both Democrats by the way--there was growth and in both their cases a lowering of the deficit and debt."

"You call Obama's two percent of annual growth to be a healthy economy? It was during his time that the middle class got creamed. Especially men."

"You're ignoring what he inherited from Bush. The world's economy was about to go over the cliff. You guys are good at glomming over unpleasant facts."

"And you're not? How about the facts of economic growth over the past year? Trump's first year. How come you never want to talk about that? Look at the stock market and employment numbers. You and your friends say it's the result of momentum from Obama policies. That Trump had nothing to do with it. Fess up--if the economy had crashed this past year wouldn't you be blaming Trump? One thing you specialize in is talking out of both sides of your mouth."

"That's the way politics works. We're all guilty of engaging in spinning." That much I granted to Jack.

"And haven't you been a huge beneficiary of the run up in the value of stocks? How's your 401(k) looking these days? I assume pretty good. I don't hear any complaints about that."

I chose not to baited into talking about that with Jack but instead said, "Another thing you're conveniently ignoring is that tax legislation doesn't exist in a vacuum. By severely restricting deductions for state and local taxes and capping how much mortgage interest people can deduct millions of middle class people will not be happy with what they see about the value of their own assets. The value of homes, the major asset of most people, is expected to decline by as much as ten percent. And this will not just be in blue states as Republicans love to chuckle about. Millions in Texas and Florida and Arizona, to mention a few red states, will also see big declines in the value of their homes. I admit that the major hits will be in Democratic states like New Jersey and California and suburban parts of New York. High tax, high inflation states. But Republican home owners in those states will also be hurt."

"And here I thought I was just calling to wish you a merry Christmas and poke you about all the people on TV ads thanking Trump for allowing them to celebrate Christmas. About that you and I are of the same opinion. This is just ridiculousness."

April 27, 2017--Laugher Curve

As I draft this, President Trump has not as yet revealed the details of his "massive" tax cuts.

In spite of this I can speculate what his multi-trillion dollar proposal will contain and how it will be paid for.

When the non-partisan Congressional Budget Office (CBO) finishes its scoring, they will find that most of the cuts go to corporations--where the effective rate will be cut from 35% to 15%.

Also, a large slice of the tax cuts will go to America's highest earners. There will, though, to put a fig leaf on the truth, be some tax savings for middle class people, mainly an increase in the deduction for dependent children. Then in regard to children, thanks to Ivanka Trump's influence, there will be tax credits to offset some of the costs of childcare.

Unless paid for, over the decade, these cuts will add multiple-trillions to the national debt. So there will be some attempt to show how the cuts will be paid for.

Nearly a trillion will be the result of repealing and replacing Obamacare. As noted here last week, the legislation inching its way through the House of Representatives is not a healthcare bill but a tax cut bill. This of course means it has no chance of passing in the Senate and probably not in the House. So chalk that trillion up to the debt.

The real savings to pay for the tax cuts will not be from savings at all but rather from extra tax income that will be the result of a dramatic rise in economic growth.

At the moment, the Gross Domestic Product (GDP) is going up by a tepid annual rate of less than two percent. The Trump proposal will show a growth rate of about twice that. They feel they can project that because tax cuts for wealthy people and corporations are stimulative to the economy. Growth will trickle down to average folks who will in turn use the extra income they derive from tax cuts and increased economic circumstances to buy cars and houses and stuff.

This assumption, this projection is based on bogus economic theory promulgated most prominently during the 70s. and 80s by Arthur Laffer. It is graphically most famously represented by the Laffer Curve which illustrates how tax cuts spur enough economic growth to generate new tax revenue which in turn cuts into the deficit.

Arthur Laffer in 1974

Here's the problem--

There is no historical or empirical evidence whatsoever that it works. When first taken up by Ronald Reagan during the 1980 Republican presidential primaries, George H.W. Bush, who was contesting for the nomination, memorably called it like it is--Voodoo Economics. Telling the truth helped cost him the nomination and the rest is history.

That history includes truly massive tax cuts under Reagan of just the sort of which Laffer would approve. And did approve. But it did not jolt the economy as promised and it was paid for, as Trump's will be, by adding trillions to the national debt. Over time, during the eight years of his presidency, Reagan nearly tripled it.

And if we need further evidence, when 20 years later, George (the son) Bush pushed another round of tax cuts through Congress, the economy collapsed and the debt doubled.

As the French would say, Viola.

On the other side of the ledger, there are other voila moments--the resulting state of the economy after Bill Clinton and Barack Obama raised taxes. Clinton raised them on the highest earners and the GDP increased annually, on average over his eight years, by 3.8%. Obama inherited a prostrate economy from George W. Bush and managed to more than halve the annual debt while the economy grew by about 2% a year.

One might, therefore, conclude that tax cuts of the Laffer kind do not follow the Laffer Curve but in spite of this here we are again with voodoo economics resurrected. Why anyone would believe Treasury Secretary Mnuchin that "The tax plan will pay for itself with economic growth" is beyond my comprehension.

He knows not all of us are economic illiterates and so he confesses that the preposterous 3-4% GDP growth rate is the result of "dynamic scoring." This is when growth rate projections are based not on observable reality but are derived from assumptions about where the economy will be as the result of various hypothetical actions. In other words, rather than projections based on a semblance of reality ("static scoring") economists such as Laffer and government officials such as Mnuchin just make things up. They pick a growth number out of the air that fits their theory and proclaim it to be the empirical truth.

These might be considered economic alternative facts. Let's see if the public and Congress will again take a sip of the Kool-Aid.