Après moi le déluge

Somehow Donald Trump ended up in the White House–an outcome that seemed to surprise even him.  Now he needs to figure out what to do next.  (No, the campaign promises don’t provide any sort of coherent guide.)  Early indications are that Trump will try to implement policies that are popular, at the cost of imposing burdens on future generations (via global warming or massive deficits or a health insurance death spiral or a loss of US foreign policy credibility.)

The Financial Times reports that Trump’s proposed tax cuts would balloon the deficit:

The package would be hugely costly if it ever saw the light of day — suggesting that it was more a mechanism for signalling the direction the administration wants to take, rather than a detailed set of proposals. Estimates from the Committee for a Responsible Federal Budget suggest the measures would cost $5.5tn over a 10-year period, with the corporate tax cut the most expensive measure.

The proposal does contain lots of good ideas, such as eliminating the deductibility of state and local taxes (which would hurt me, but is still a good idea.)  It would also eliminate the AMT and death taxes, both long overdo.  Unfortunately, Trump doesn’t seem willing to pay for any of this.  It’s like someone who wants to eat ice cream and skip the vegetables. Trump seems opposed to cutting government spending, and also opposed to proposals such as eliminating the tax deductibility of health insurance and mortgage interest.  He’s also opposed to the border adjustment tax.

[I also oppose the BAT.  But I’d still prefer the Brady bill, despite that provision, as it at least tries to be deficit neutral.  Even better would be a carbon tax, and/or a higher payroll tax on high wage earners.]

In an optimal fiscal policy, the debt/GDP ratio rises during periods of high unemployment and falls during periods of low unemployment.  Trump’s proposal would cause the debt ratio to rise even in good times, and to soar in recessions. And that’s not even accounting for the looming demographic nightmare of boomers retiring.  This is a deeply irresponsible proposal.  Rather that rejecting the proposal, Congress should keep the good stuff and raise additional funds by closing loopholes.  In addition to the ones mentioned above, I’d close the deduction for interest paid by businesses.  Instead, I expect Congress to oppose even the one good idea, ending the deductibility of S&L taxes.  I hope I’m wrong, but I expect a really bad bill to come out of Congress.

PS.  Trump also wants to slash the tax rate for billionaire property developers (like Trump) from 39.6% to 15%, barely half the rate I have to pay.  Sad!

PPS.  Here are some good articles that I don’t have time to blog on:

1.  Why Europe still needs cash

2.  Why trade deficits aren’t about trade

3.  Why China may be growing faster than the official GDP numbers suggest


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36 Responses to “Après moi le déluge”

  1. Gravatar of RF RF
    27. April 2017 at 05:43

    Question question — what is the logic behind supporting the elimination of state/local? Why is this a good policy suggestion?
    I’ve never really come across anyone with strong opinions on this, so genuinely curious. Thanks.

  2. Gravatar of aram aram
    27. April 2017 at 05:56

    What’s good about removing the S&L tax deduction? Discouraging S&L income taxes?

  3. Gravatar of LK Beland LK Beland
    27. April 2017 at 06:06

    “Trump’s proposal would cause the debt ratio to rise even in good times, and to soar in recessions. ”

    Basically the effect of the Bush tax cuts.

  4. Gravatar of ssumner ssumner
    27. April 2017 at 06:19

    RF and aram, This deduction essentially subsidizes S&L spending, and thus it encourages wasteful spending. It also makes the tax code more complex. Complexity is wasteful; I had to pay someone $1500 to do my taxes this year.

    LK, Yes, but much worse.

  5. Gravatar of bill bill
    27. April 2017 at 06:46

    I’d like to see C-corps taxed like REITs. Distribute the net income each year and let it be taxed at the investor level. It ends the problem of double taxation and puts debt and equity on equal footing (the recipients of interest and the recipients of dividends would each be taxed). This also simplifies 1040s which are currently more complicated because they tax dividends differently from other income.

  6. Gravatar of LK Beland LK Beland
    27. April 2017 at 08:16

    “LK, Yes, but much worse.”

    I agree. I’m reading that the deficit could balloon by $0.6T per year. That would take it to over $1T per year, or >5% of GDP. Basically back to the Reagan era (actually, so many parallels to Reagan: TV/movie personality, tax cuts, protectionism, military muscle-flexing).

  7. Gravatar of ssumner ssumner
    27. April 2017 at 08:28

    Bill, I’m no expert on taxes, but that sounds reasonable.

    LK, Even worse, under Reagan NGDP growth was pretty fast (around 7%) so we could support much larger deficits than today.

  8. Gravatar of pras pras
    27. April 2017 at 10:32

    The S&L deduction is ridiculous. That is a no-brainer elimination that all sides should support. Absolutely no justification for its existence.

  9. Gravatar of pras pras
    27. April 2017 at 10:37

    The only way to justify the S&L deduction is that the states that charge income tax should also reduce the Federal money they receive by the same. As a result, residents of the state can deduct from Federal income tax so that they don’t pay for Federal money they’re not receiving as a state.

  10. Gravatar of Kevin H Kevin H
    27. April 2017 at 10:39

    Trump’s trade plans as of yet would do absolutely nothing about the trade deficit. But his tax plan’s explosion of the budget deficit, by further increasing the gap between consumption and saving, would explode the trade deficit he so decries. Sad!

  11. Gravatar of Steve Steve
    27. April 2017 at 13:07

    “Trump will try to implement policies that are popular, at the cost of imposing burdens on future generations “

    So you’re saying Trump is just like Bush and Obama? Sad! (Or should I say low-energy Kenyan cuck?)

  12. Gravatar of Steve Steve
    27. April 2017 at 13:15

    Bill: I’d like to see C-corps taxed like REITs.
    ssumner: Bill, I’m no expert on taxes, but that sounds reasonable.

    The problem with this is it is a huge subsidy to tax-free entities, including endowments, 401ks, and public pension funds; most of the benefit goes to the people already at the top in terms of retirement security (and people who vote “establishment”).

    Tax reform and public finance is going to be a vexing problem for the next generation because some subset of promises needs to be broken, ranging from soc sec, to 401ks and pensions, to non-distortionary taxes on businesses. Right now the center-left and center-right are both built on phony promises (trump is abandoning the populists for center-right policies), which will abet populism in the long-run.

  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. April 2017 at 13:58

    ‘But his tax plan’s explosion of the budget deficit, by further increasing the gap between consumption and saving….’

    The outline Trump released seems to increase incentives for investment, which would mean increased incentives to save.

  14. Gravatar of Russ Abbott Russ Abbott
    27. April 2017 at 14:57

    SSumner,

    It seems grossly unfair to be required to pay taxes on money one pays in S&L taxes. If your beef is with S&L spending, attack it directly, not by penalizing tax payers.

    Also, I don’t understand the objection to deducting interest payments as a cost of doing business. Why favor one cost over another?

    Regarding complexity, I agree. Let’s establish a system like the ones they have in many European countries in which the IRS computes your taxes and sends a bill. You can then accept the calculation or dispute it. If our tax system is subsidizing anything it’s companies like H&R Block that make enormous amounts of money from the forced inefficiency in the way we file our taxes.

  15. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2017 at 15:25

    What if the old Reagan-Bush war cry, “Deficits do not matter!” is really true?

    Most analysts say the Trump tax plan will boost federal deficits and the national debt.

    And?

    The Bank of Japan is buying back the Japanese national debt, and has no inflation. Soon the BoJ will own the Japanese national debt. The Japanese government will owe the money to itself (or taxpayers to themselves). I call it Mobius-strip economics.

    The Fed bought $3 trillion or so in Treasuries in its QE program, and has been below inflation targets ever since.

    Okay, so Trump adds $5 trillion to the national debt. And in next recession, the Fed buys it back.

    I am not describing a theory. I am describing what has happened in the U.S. and is happening in Japan.

    I realize, “That may be true in fact, but more importantly, is it true in theory?” is the orthodox macroeconomic framework.

    But seriously, do national government debts matter anymore?

  16. Gravatar of ssumner ssumner
    27. April 2017 at 18:45

    Russ, You said:

    “If your beef is with S&L spending, attack it directly, not by penalizing tax payers.

    Also, I don’t understand the objection to deducting interest payments as a cost of doing business. Why favor one cost over another?”

    It’s not about penalizing taxpayers, it’s about making the system more efficient.

    Second, ending the tax deductibility of interest doesn’t favor one cost over another. Right now dividends are not deductible–it’s about providing a level playing field where debt and equity are taxed equally. I’m also OK with making dividends deductible.

    Ben, You asked:

    “But seriously, do national government debts matter anymore?”

    I don’t don’t know, ask the Greeks.

  17. Gravatar of Jim Glass Jim Glass
    27. April 2017 at 19:08

    It seems grossly unfair to be required to pay taxes on money one pays in S&L taxes

    The cost of government is not reduced at all by making some of it deductible by some people. All that does is shift the deducted part of the cost onto other people, who must then pay more taxes to make up for it, or pay the increased the cost of servicing the increased debt that results (through more taxes).

    In this case the “other people” who are on the losing end of the cost shift are overwhelmingly lower-income people who don’t file itemized returns, and people in other lower-tax rate and lower-nominal income (by cost of living) states. What’s fair about the high-income minority in NYS getting to shift part of the cost of their state government onto people in the Midwest and South? (And I write this as a NYCer.)

    BTW, if you want to see progressive politicians who reflexively bash “the rich” suddenly rise en masse to the defense of the rich, take a look at what happens every time this basic reform proposal surfaces when a Republican administration takes over. Last time was during the Bush administration, and here in NY Sen Hillary, Schumer et all rose as one to protest “over our dead bodies”!

    “Increase taxes on the rich” is to Democrats what “repeal Obamacare” was to Republicans over the last eight years — a very attractive and easy policy to endorse when you know there is no possibility that you can do it, not nearly so attractive and easy to endorse when you actually can.

  18. Gravatar of Jim Glass Jim Glass
    27. April 2017 at 19:28

    What if the old Reagan-Bush war cry, “Deficits do not matter!” is really true?

    That wasn’t a Reagan war cry. People forget Ron supported and got enacted several tax increases during his later years, to reduce the debt growth that resulted from his big initial tax cut. And the big, hugely successful tax reform of his time, TRA ’86, was carefully revenue neutral both overall and by income level. After that Bush I was very tough on the deficit, and politically suffered greatly from breaking his “read my lips, no new taxes” pledge by upping taxes as part of a deal to get spending restraints (which worked, btw.)

    The “deficits don’t matter line” was Cheney’s during the Bush II years, and it wasn’t about deficits not mattering in economics but about deficits no longer mattering *politically*, on election day.

    “You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections” — Cheney to Treasury Secretary Paul O’Neill.

  19. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2017 at 20:22

    Scott Sumner:

    Deficits don’t matter—“ask the Greeks.”

    That is a shallow answer.

    Yes, the Greeks do not have their own central bank. Big mistake.

    But the Japanese?

    Investors are willing to buy 10-year JCBs for 0% yield. The market says “deficits don’t matter” for the Japanese, and after the Fed’s QE program, for the U.S. too.

    True, a Zimbabwe or a Greece or some other basket-case country might be unable to repay its debts or might run into inflation.

    But the markets eat up any debt issued by the US or Japan. Both those nations have the option of simply retiring debt by buying it. Japan is effectively following this course.

    The real question is, “Does orthodox macroeconomics have in its toolkit an explanation for what Japan is able to accomplish?”

    I think the answer is “no.”

    The Bank of Japan owns 43.2% of JGBs, buys 10-year JGBs whenever the yields tops 0%, and has record-low unemployment.

    In short, is you read a macroeconomics textbook, in theory Japan right now has 100.9% daily inflation.

    Except in the real world, Japan has near-deflation.

    So, the best explanation for Japan is to…mention Greece?

    Well, in some ways I can’t blame you. I can’t explain Japan either. But it is there. Macroeconomic theory is hollow in relation to Japan.

  20. Gravatar of Don Don
    27. April 2017 at 20:27

    Why is AMT bad? Twice the math?? If so, then have AMT only over $250K. That should a lot of effort.

    What I like about the BAT is that it is a step towards a VAT and taxing consumption is better than taxing income, since it has less distortion. A country-by-country BAT (adjusted for opposing countries VAT) that is between 5% and 25% is better than the current import tariff scheme with 1000’s of items taxed differently (13,000+ lines on harmonized schedule). The current scheme is a recipe for corruption and rent seeking.

  21. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2017 at 20:28

    Jim Glass:

    Well, good points…but on the other hand, the last U.S. GOP President to run a balanced budget was……Dwight Eisenhower. I like Ike.

    My advice: Don’t drink the blue Kool Aid, don’t drink the red Kool Aid.

    Obama just took $400,000 to give a single speech to Cantor Fitzgerald, the bond shop. Those guys need a tax cut.

    Trump will give it to them.

    And the last US GOP president not to use offshore bank accounts….

    I like Ike.

  22. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2017 at 04:39

    ‘…the last U.S. GOP President to run a balanced budget was……Dwight Eisenhower.’

    Whose tax revenues were about 17-18% of GDP, iirc. His defense spending was 9%.

  23. Gravatar of ssumner ssumner
    28. April 2017 at 04:41

    Jim, Good post.

    Don, The AMT has no justification, and it makes filling out taxes almost twice as hard. It’s the most obvious thing to eliminate if we move to tax simplification. It’s one of the reasons I had to pay someone $1500 to do my taxes this year. Pure waste.

    A country by country BAT makes no sense, as the BAT is claimed (by its proponents) to be trade neutral.

    Ben, So your entire policy is just to cross your fingers and hope that interest rates stay near zero, even though they are currently rising, and the markets expect them to rise further? I’m not saying you will definitely be wrong, but can we really base our policies on a hope that rates stay near zero (which of course means your preferred monetary inflation will have failed.)

    Japan has near zero rates because they have near zero NGDP growth. Do you favor near zero NGDP growth for the US? Obviously not—so why cite Japan as a model of manageable debt?

  24. Gravatar of ssumner ssumner
    28. April 2017 at 04:42

    Ben, Clinton ran a surplus in his final three years.

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2017 at 04:43

    Actual defense spending during the Eisenhower years was higher than the 9% of GDP the budget records, as we relied on the draft for a substantial part of the manpower.

    Which is Jim’s point about cost shifting of taxes from rich to poor, btw.

  26. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2017 at 04:48

    ‘I had to pay someone $1500 to do my taxes this year. Pure waste.’

    These days ‘the poor’ have to pay a few hundred dollars to have their taxes done too. If they want to take any of the tax credits available, such as EITC or the childrens’ tax credit.

  27. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2017 at 05:02

    It should also be noted that under a bewildering variety of tax laws in my lifetime (post WWII) tax revenues as a percentage of GDP usually come in between 17-19% of GDP.

    And that revenue that is income tax in origin comes almost exclusively from ‘the rich’–i.e., high income earners like LeBron James and Bill Clinton. No country in Europe, except Switzerland, takes in such a high percentage of their tax revenue from their high income earners as we do. If you want to increase tax revenue over 19% PERMANENTLY, it will have to come from those not currently paying their share. I.e., the poor.

  28. Gravatar of Student Student
    28. April 2017 at 06:14

    @Ben Cole,

    1.) Clinton ran surpluses initially…

    2.) You realize that the top marginal rate during Eisenhower’s presidency was 90%+ right.

    Even people with incomes in the of $400,000 – $500,000 range (in todays dollars) would have been in the paying marginal rates in the mid 70%s.

  29. Gravatar of dtoh dtoh
    28. April 2017 at 06:25

    Scott,

    You said; “This is a deeply irresponsible proposal.”

    That depends on what impact you believe the tax cuts will have on NDGP growth.

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2017 at 10:38

    ‘ Clinton ran surpluses initially…’

    No, he didn’t;

    http://www.taxpolicycenter.org/statistics/federal-receipt-and-outlay-summary

    The first surplus came in 1998, and it came as a surprise to Clinton. At least he wasn’t predicting that during his 1996 re-election campaign.

  31. Gravatar of Student Student
    28. April 2017 at 11:28

    @Pat,

    My bad, I meant to write eventually, thanks for correcting me.

  32. Gravatar of Benjamin Cole Benjamin Cole
    28. April 2017 at 20:17

    I don’t know if anyone is reading anymore but:

    This is what I wrote:

    “Well, good points…but on the other hand, the last U.S. GOP President to run a balanced budget was……Dwight Eisenhower. I like Ike.”

    I said “GOP president.” Clinton was a Donk.

    I still like Ike. And Tater Tots.

    “Ben, So your entire policy is just to cross your fingers and hope that interest rates stay near zero, even though they are currently rising, and the markets expect them to rise further? I’m not saying you will definitely be wrong, but can we really base our policies on a hope that rates stay near zero (which of course means your preferred monetary inflation will have failed.)”–Scott Sumner.

    I concede it is possible if the Fed conducted, say, $1 trillion a year in QE, at some point we might see inflation above 2%.

    That has not been the result in Japan however. They are skimming along the deflation frontier. It appears likely they will totally eliminate their national debt in the next 10 years, while growing real GDP in the low 1% range.

    Japan is currently growing real GDP at 1.6% a year, while Q1 US GDP came in at 0.7%. As of now, they are beating us.

    Hmmm.

    Yes, why not eliminate the national debt? Or at least offset deficit-spending though QE?

    Is there a higher goal we must suffer for (a religious type thought) or can we make macroeconomic policy work for us?

  33. Gravatar of ssumner ssumner
    29. April 2017 at 05:13

    Ben, I missed the “GOP” part.

    Having the BOJ buy back the debt does not “eliminate” the national debt.

  34. Gravatar of Benjamin Cole Benjamin Cole
    29. April 2017 at 15:51

    Scott Sumner:

    “Having the BOJ buy back the debt does not “eliminate” the national debt.”

    Adair Turner says when a national central bank owns national debt, it is in effect eliminated. It is only an accounting convention that the debt still exists.

    The US Federal Reserve could easily set up its own money desk to buy US Treasuries and then could simply retire the Treasuries after purchase. After all, the bondholders have been paid off!

    There is no law of physics that prevents this, only the laws of man.

  35. Gravatar of ssumner ssumner
    30. April 2017 at 05:26

    Ben, That’s just wrong, as I’ve pointed out many times.

  36. Gravatar of Jim Glass Jim Glass
    30. April 2017 at 06:09

    “I loved my previous life. I had so many things going. This is more work than in my previous life. I thought it would be easier.”

    http://www.reuters.com/article/us-usa-trump-100days-idUSKBN17U0CA

    And yet…
    ~~~

    “Donald Trump ended up in the White House–an outcome that seemed to surprise even him. Now he needs to figure out what to do next…

    “Early indications are that Trump will try to implement policies that are popular, at the cost of imposing burdens on future generations”

    Social Security, Medicare, Obamacare, unfunded federal pensions that are comparable in scale to those … add as many more as you wish.

    “The Financial Times reports that Trump’s proposed tax cuts would balloon the deficit”

    Reagan, Bush II, Obama renewing 90% of the Bush cuts.

    “The proposal does contain lots of good ideas …Unfortunately, Trump doesn’t seem willing to pay for any of this. It’s like someone who wants to eat ice cream and skip the vegetables.”

    See all the above, add LBJ’s ‘guns and butter’ and as many more as you wish.

    “Trump seems opposed to cutting government spending, and also opposed to proposals such as eliminating the tax deductibility of health insurance and mortgage interest.”

    As opposed to the other presidents who actually cut government spending and who publicly tried to eliminate the deductibility of health insurance and mortgage interest, such as … who was that guy?

    Trump also does a complete flip turn on NAFTA after being shown a map of how ‘terminating’ it would affect the people who voted for him…

    https://www.washingtonpost.com/politics/i-was-all-set-to-terminate-inside-trumps-sudden-shift-on-nafta/2017/04/27/0452a3fa-2b65-11e7-b605-33413c691853_story.html
    ~~~

    … he acts just like every other president. One might think that electing a naif, Cliff Clavin-type amateur as President would produce something dramatically different. But nope, policies continue as before, only executed much more amateurishly. (Which, IMHO, is what gets so many people so heated about him – his amateurishly rude disregard of the established ‘good manners’ of politics, as opposed to his policies, which are well within political norms.)

    More ‘natural experiment’ data backing Bruce Bueno de Mesquita’s take that the Head of State’s policies are overwhelmingly determined by the incentives in the system, not by the HoS, who has much less power for independent action than most imagine. (As Trump clearly is learning — and Bannon is too, as he compiles a W-L record to challenge the ’62 Mets.) Just drop any amateur random person in as HoS and see.

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