The GOP’s Hail Mary Pass

House Speaker Paul Ryan savors his biggest legislative victory.

Faced with a chronically slow-growth economy, expanding deficits, mounting federal debt, and a looming funding crisis for the U.S. welfare state, Republican congressmen are, to borrow a football metaphor, throwing a hail Mary pass into the end zone in the desperate hope of scoring a winning touchdown. They are gambling that tax cuts combined with President Trump’s deregulation agenda will boost economic growth from roughly 2% per year to 3% or more, reducing the tax burden for millions of Americans, creating new jobs, boosting wages, and bending the curve on long-term deficit projections.

Convinced that the tax cuts will prove to be a disaster for everyone but the rich, Democrats and the mainstream media have subjected the tax plan to relentless, unremitting attacks. Viewed in terms of static economic analysis, we are told, the tax cuts will inflate federal deficits by a cumulative $1.5 trillion over the next ten years. Suddenly, deficits matter!

Republicans respond that measures in the bill — accelerating write-offs for business investment, encouraging the repatriation of hundreds of billions of dollars in corporate profits to the U.S., and making the corporate tax rate more competitive internationally — will stimulate economic growth. Unlike the Democrats, I think that much will prove to be true. My question is: Will faster economic growth generate enough new tax revenue to offset that $1.5 trillion? Longer term, will it avert Boomergeddon?

Let’s dig into the numbers. The Congressional Budget Office’s current 10-year budget forecast assumes a modest 2.1% annual growth rate over the next ten years, a slight uptick from the trend established during the Obama years. But economic growth has accelerated to roughly 3% in the past couple of quarters, and the Trump administration’s deregulation + tax cuts strategy could nudge it even higher. Let us assume for purposes of discussion that, thanks to the tax cuts, the U.S. can grow the economy at a sustainable rate of 3.1% annually. What does an extra percentage point in economic growth get us in deficit fighting?

Well, the latest CBO federal revenue forecast for the next ten years is $43 trillion. A 1% boost in federal revenues will yield $430 billion, not nearly enough to close the $1.5 trillion gap. The analysis gets a bit more complicated because economic growth and higher incomes push Americans into higher tax brackets while a roaring stock market generates massive capital gains. So a 1% increase in economic growth could produce more than a 1% increase in federal revenue. Let’s go for the gusto and double the growth-to-revenue ratio, assuming that federal taxes increase actually increase by $86 billion per year over current projections. That’s still doesn’t close the ten-year $1.5 trillion gap.

Could the economy grow much faster than 3.1% over the decade ahead? I’m skeptical. First, Baby Boomers are retiring in droves, and the working-age population is stagnating. A growing labor force supports economic growth; a stagnant labor force undermines it. Second, the Federal Reserve Board, intent upon unwinding the monetary stimulus of the Obama years, will continue to raise interest rates. It goes without saying that higher interest rates are a damper to economic growth.

In summary, in my untutored opinion, I think that the U.S. will see modestly faster economic growth over the next few years. The Dems have predicted economic Armageddon. They won’t get it. The lives of millions of Americans will improve… in the short run. But Republicans are deluding themselves if they think modestly faster economic growth will reduce the nation’s long-term structural budget deficit. Entitlement spending is still running out of control, and the nation still faces a hideously painful fiscal reckoning. Our 20-year future still looks like Boomergeddon.

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49 responses to “The GOP’s Hail Mary Pass

  1. Your analysis did not include, so far as I understood it, the impact from repatriation of foreign earnings of which there are somewhere north of 2.5 trillion overseas.
    How much of that do you think will come back and what will be its impact?

    • Getting U.S.-based multinational companies to bring back a significant part of the $2.5 billion of cash being warehoused overseas can add a lot to the U.S. economy and better paid jobs. I suspect a lot of this cash will go to new tech and new industries, including renewable energy, high-tech vehicles, electric vehicles, 5G technology and smart electric grids and transportation, robots, etc.

      I’ve read many comments about how renewable energy and other high-tech developments will create new, well-paid jobs. So doesn’t this help jump start more investment? Our corporate tax code lagged those of our competitors overseas. It’s worth something to fix that.

  2. I alluded to the repatriation of foreign earnings in the post. That’s a big reason why I think it plausible to suggest that U.S. economic growth can sustainably accelerate to 3% or more in the years ahead. I just don’t see it offsetting $1.5 trillion in added deficits.

    If you have reason to think that it can, please share. I am open minded on the subject.

  3. No body wants to cut entitlement spending, they just want to let it so it whams people all at once. Not smart. A pinprick now and then but massive social upheaval once you tell people they paid into something and get squat out of it.

  4. Well… you’re using fiscal stimulus to goose the economy that is virtually already at full employment and who are the unemployed that are left that would find work and what kind of work would they be getting in a higher growth economy other than low-paying service jobs – and how are you going to get increased tax revenue from that?

    But we ARE going to see increased aggregate demand at least for as long as tax rates to the middle class are reduced AND they actually do spend that money on something – like cars or other big ticket.. rather than socking it away in their 401Ks – of which data shows 3/4 of workers have not put away enough for their retirement.

    Most legitimate credentialed economists left and right say the increased spending is not going to deliver enough increased revenues to offset the borrowing but non-economists .. GOP .. so fervently believe in trickle down that it’s like catnip… they just can’t stay away from it – even when it’s a huge gamble that could do to the US economy what happened in Kansas.

  5. If the next step is true with regard to cutting govt spending.. especially entitlement spending..you gotta call this the GOP Kamikaze Congress and that could really be the case with Ryan and others so committed to making entitlement cuts that they’re going to do it knowing it’s going to affect prospects for re-election.

    It will be interesting that many folks who consider themselves Conservatives – who also receive MediCARE and either do not know or know or pretend otherwise that they already paid for Medicare which is not the case. They paid for Medicare Part A in their FICA tax but not Medicare Part B which currently charges about $135 a month for many – and is doomed to fail at that price. It needs to cost about $500 a month and that means a lot less second homes and fancy cars in the driveway… for those who have Medicare .. a much bigger portion of their income will go to pay for their Medicare. Some folks don’t know this because the Medicare PartB premiums are automatically deducted from their Social security… but the plain fact is that no one paid for Medicare Part B in their FICA taxes.

    Will the GOP cut Medicare even if it costs them their jobs? Not enough of them… probably. Will the Dems demagogue the GOP if the GOP does it? You bet they will!

  6. I don’t see it as a Hail Mary, but one of many steps to try to bring jobs back to America. Globalization has decimated our job base. The question is, is the job/industry loss good or bad for America?

    Many say it’s bad, and corrective actions should be taken, but I would say liberals tend to feel it’s good to outsource jobs in “dirty” industries that liberals would prefer to ban from America. The liberal philosophy weakness, in my view is, they want to say NIMBY not in my back-yard for industries we as politically incorrect, but liberals have no issues whatsovever with importing cheap goods and services from overseas and countries with lax environmental laws and labor laws. Also the liberals have generally branded their old support base (blue collar workers) as “deplorables” essentially giving Trump that trump card.

    We have cheap energy now, which is helping to spur a “renaissance” but I think we should probably call it a “mini-renaissance” . Then we apparently had an unusual corporate tax structure which encourages overseas investments.

    Fixing these issues is still only part of the problem. Infrastructure investment stimulus is probably the step. But that still will not reform American corporate business management attitude$, where there probably needs to be some shake-up down the road if American business can’t shake their love of money over what’s good for society.

  7. I’m skeptical that we’re going to “bring jobs back to the US”.. in that .. labor – like capital these days is mobile and goes to where it provides the best return on investment.

    We’re simply not going to make widgets in this country for twice as much as they can be made elsewhere and try to erect barriers to import.

    No investor in their right mind is going to build a factory in SW Va making stuff for twice as much as overseas – and depend on the govt – over the next 20-30 years to protect him/her from imports.

    Our problem is that we have too many people with insufficient education for 21st century work and we are reduced to fighting other countries for low-skill labor jobs that would not even sustain our ow workers in our current standard of living. We’d have full time workers earning poverty level wages with no health care and no retirement… – like we are seeing right now with many service level jobs.

    We can’t turn this clock back.. it’s like we’re fighting the industrial revolution all over again.

    Virginia is the first state to require computers in the SOLs.. it’s a start but all of our kids have to get a lot better academically if we are going to compete with other industrialized nations. We rank 25 in education against them and yet – our response is to fight for those low level jobs … instead of dealing with the reality of the education issue.

  8. I say the same thing about this tax reform package as I said about Obamacare – at least they did something. Th real question is whether the elites who really control this country will be willing to modify the program as the results come in. That never happened for Obamacare.

    The top US corporate tax rate was too high. The lefties first screamed that US corporations avoided taxes through loopholes and never paid anything like the top rate. Now that the top rate has been lowered it’s going to cost us gadzillions of dollars in lost corporate taxes. Logically speaking, both those statements can’t be simultaneously right.

    The US is the only developed country that taxes a company on profits earned overseas after the taxes were paid to the foreign country where the profits were earned. No wonder the profits don’t get repatriated. The perversions of this simple minded approach were wide. For example, entrepreneurs knew that founding a company overseas would allow a US company to buy them using “offshore” cash that did not have to be repatriated. Ugh!

    Deficits are a function of economic activity more than tax rates. The deficits were going steadily down after the so-called Bush tax cuts (only Congress can cut taxes) until the 2008 recession. Of course, there is no relationship that I can see between deficits and income or wealth distribution. So called “trickle down” schemes don’t address income inequality for a variety of reasons.

    I have pretty high hopes for this tax reform … and, for what it’s worth … I will be paying more in federal income taxes than I was. The great hope has to be that this reform will catalyze economic growth and start to put supply stress on labor. Inadequate supply relative to demand has a predictable result – increased price. In this case increased wages. Wage growth stagnation, particularly for the middle class, has been crushing the country for 40 years. Lefties, righties, Republicans, Democrats … nobody has been able to make a dent in the income distribution problem because nobody has been able to generate real growth in wages. Maybe this will.

    Wouldn’t it be a surprise if President Trump turned out to be an abrasive, loudmouth New Yorker … who was right? How is ISIS doing these days? You don’t hear much about that on the news anymore. I wonder why not?

  9. With Tax Reform, AT&T Plans to Increase U.S. Capital Spending $1 Billion and Provide $1,000 Special Bonus to more than 200,000 U.S. Employees

    http://about.att.com/story/att_tax_reform.html

    • When I was a partner at Andersen Consulting every pay check stub mailed or, later, e-mailed to me said “Brought to you by our clients.” It was a little thing but I always thought it had outsized importance. No customer, no paycheck.

      In the spirit of remembering who brought you the money you receive I hope the bonus checks from AT&T to their employees say, “Brought to you by President Trump and the Republican Party.” Or get really fancy and personalize the checks:

      “The basis for this bonus check was opposed by your Democratic representatives in Congress – (insert employee’s US Representative(s) of Senator(s) name here).

  10. The follow-on POTUS always gets the credit or blame for what was set-up in the PRIOR administration… the good economy we have right now did not start on Jan 16, 2017… ditto.. the fight against ISIS…

    I totally agree on the Corporate tax as well as the related policies that are said to have encouraged corporate behaviors not advantageous to the US.

    It’s not that simple.. though… and we’ll see how it plays out. Many corporations like GE – for instance, already paid no taxes.. by exploiting other existing tax policies.. Truth is few corporations paid the top rate.. and most of the find ways to avoid the tax. Those things they did to configure their companies so as to evade the tax – cannot be easily changed and in some cases – it is said that they lose their pet loopholes and will end up paying the new statutory rate – which is higher than the one they had before!!

    Long, story short – and I bet DJ know this full well.. it’s going to take a while to see how these changes work … and as said earlier, I’m onboard with those changes.

    DJ also says: ” Lefties, righties, Republicans, Democrats … nobody has been able to make a dent in the income distribution problem because nobody has been able to generate real growth in wages. Maybe this will.”

    It’s not like there have NOT been tremendous gains in productivity.. there has.. and Corporations are swimming in the largess!!!

    Yes indeed – Wage-growth stagnation – used to be productivity gains were “shared” between corporation and workers sometimes with the help of unions.

    But that has now changed – and Corporations pretty much scarf up all the gains from productivity and workers get little if any… because …. a lot of these gains come from automation which actually reduces the need for workers and in shedding workers.. the ones remaining are lucky to keep their jobs.. forget raises and more benefits!

    That’s just the reality… workers no longer get “more” from higher productivity. Wanna fix that? Be my guest.. I have no clue how you’d do it other than having the govt force some kind of sharing.. which is very probably and VERY BAD idea…

    we talk like this “wage stagnation” is not a normal thing and we need to fix it. Well.. I’m not convinced it’s abnormal at all.. I think it’s what does happen when you automate.. and the people who lose their jobs to automation don’t have the knowledge or skills to go after other jobs that are in the economy. This goes back to the fact that our kids rank 25th in the world in academics.. and their Dads/Moms who get replace by automation don’t even have the academics their kids ranked 25th have…

    Any Conservative worth their salt – ought to know – you cannot “give” work to someone who lacks the skills and education needed to do that job – but are Conservatives essentially advocating a similar thing when they want to “bring back jobs” gone overseas… or “help” those who suffer wage stagnation?

    we just have too many people going after fewer and fewer 20th century skill/knowledge jobs and running away from 21st century jobs…

    we have a world where drone technology is exploding… whee autonomous cars and the infrastructure needed for them is exploding… where phones are now internet computers.. these are jobs, good jobs .. but they require highly educated workers..

    White collar workers are now like auto mechanics. Auto mechanics typically have their own tool kits.. they take with them when going to a new job. That’s what 21st century workers have to do now.. Their “resume” is their de-facto tool kit… employers no longer “take care” of you – you are now responsible for that.

    • Not at all true, especially regarding ISIS. This is a pretty good article from Newsweek:

      http://www.newsweek.com/trump-isis-raqqa-isis-capital-687391

      Like most failed leaders with too little leadership experience, Obama was a micromanager. Like Jimmy Carter before him he inserted himself into operational details where he lacked understanding. His blessing is that he’s an extremely smart guy but in the case of managing the US military, experience in warfighting beats academic intelligence every time.

      Trump let the military commanders fight ISIS and the military commanders won.

      • ” Bergen: No, Trump didn’t defeat ISIS”

        ” The operation to take back Mosul, the second-largest city in Iraq where ISIS had first declared its “caliphate,” began in October 2016 while President Barack Obama was still in office and had been long-planned.
        Shortly after the Mosul operation was launched, Gen. Joseph Votel, the commander of US Central Command, which oversees the wars in Iraq and Syria, told me: “We have been doing preparatory stuff against Raqqa and Mosul for a long time, long before we said, ‘the assault on Mosul has begun.’ We have taken out 36 ISIS leaders in the Mosul area; to me that is part of the preparation phase.”
        Under Obama, ISIS also lost significant Iraqi cities such as Falluja, Ramadi and Tikrit.
        To be sure, Trump loosened the “rules of engagement” for the US military, enabling ground commanders to more easily carry out operations without having to seek permission up the chain of command, but these are tactical changes — not strategic game changers.”

        Calling Obama a “micromanager” compared to Trump and his specific hand-ons direct changes to virtually every govt agency is funny… He very publically undercuts his own-appointed Dept of Justice – as well as the Sec of State?

        Remember also opponents claims about Obama “killing” innocents with drone strikes?

        ” Barack Obama will not tighten the rules governing US drone strikes ahead of Donald Trump’s inauguration, the Guardian has learned.

        Trump will inherit the apparatus for what Obama calls “targeted killing” – the so-called drones “playbook” formally known as the 22 May 2013 Presidential Policy Guidance or PPG – that has turned drone strikes into Obama’s signature counter-terrorism tactic.

        While the White House considers its standards for drone strikes to be scrupulous, much of the rest of the world considers them to represent an arbitrary, secret and dangerous apparatus of secret killing that Trump will soon have at his disposal.”

        Obama had set the stage for the defeat of ISIS.. The military was already in place and actively closing in on ISIS and Obama’s drone strikes were systematically taking out the leaders..

        It’s not like the military had been sitting on the sidelines waiting for further instructions.

        Obama was being castigated for the drone strikes.. remember? Conservative in this country were calling him a war criminal for
        the drone strikes that killed civilians.. remember?

        On the trade issues – we’re going to pay a price for his unilateral grandstanding… the second shoe is going to drop as other countries respond.. Maybe there is a middle ground between all out Globalization and Protectionism…but I don’t think Trump has but two speeds all out full on and off.. That’s does not work in the real world dealing with other countries.. he’s pissed off more than a dozen other countries to date.

        • To be sure, Trump loosened the “rules of engagement” for the US military, enabling ground commanders to more easily carry out operations without having to seek permission up the chain of command, but these are tactical changes — not strategic game changers.”

          Nope. Not tactical at all. Changing the point in the chain of command where decisions are made is a matter of fundamental management acumen. Anybody who thinks that is tactical either doesn’t know what the hell he is talking about or is dissembling to try to make a point.

          • it depends on the rules of engagement to a certain extent but that IS tactical…on the battlefield… not the overall strategy of what you do or not …for instance.. sending 30,000 more troops is not tactical… it will lead to tactical engagements.. of which at that level there are rules of engagement… but at the higher up levels.. it’s not rules of engagement.

    • Back in the early 80s when I started my career I don’t remember ever hearing the term H1-B visa. Certainly nobody talked about off-shore development. The tech sector was growing fast so companies like Arthur Andersen and EDS stood up very sophisticated training centers. Hell, Arthur Andersen bought a defunct college in St Charles IL and turned it into a state-of-the art training center.

      These companies would go on college campuses and recruit smart kids who maybe didn’t study all the right subjects to be techies out of the box. They’d say, “We’re going to make you the lowest paying job offer you’ll receive. But we’re going to train you in advanced technology. On the job, in the classroom, at the conferences. We’re going to invest in you.”

      Damn if they didn’t. I went through all the training. It was no BS stuff. A decent percentage of my fellow trainees quit shortly after the initial 3 week training course at that former college in St Charles IL. Years later I asked the best network engineer who ever worked for me what he studied in college. “EE”, he said. Then he started laughing and continued, “English and Economics”.

      The key is to create enough of a labor shortage that US companies have no choice but to train people for the jobs they need filled. That comes in two strokes – a fast growing GDP that adds to demand and no more large scale importing of foreign people to fill those jobs nor exporting of the work to elsewhere to be done.

      I think you need to tell these companies – this tax reform bill is a pretty damn good deal for you. However, it does come with a few strings attached …

  11. I was a little surprised when I read Jim’s praise of the Republican recently enacted tax reform. The net effect on GDP growth over the net several years will probably be negligible. The economy is fairly strong now with unemployment at a 10 year low. a stimulus program
    enacted during a period of economic prosperity will not have a great effect. I would rather have had this Fiscal ammunition saved for a period of weakness.
    Of interest the President did not use this opportunity to rid the tax code of the “carried interest” provision that benefits the hedge fund donor class of Tzar Trump.
    Repatriation of overseas profits could be a competitive plus, but I would like to have seen a provision to utilize these fund for capital investment and R and D. Most belief that these monies will be used for stock buy-backs and dividend increases.
    What was not discussed was th elimination of state and local taxes paid above a certain limit. The impact of this has not ben studied nationwide, but a recent study of a New Jersey Commuter suburb indicated a 10% reduction in the value of residential real estate. How will this affect the funding of government services as well as the function of the municipal bond markets. These issues will play out over time.
    Northern Virginia Watch Out!

    • I agree, it will be interesting to watch the impact of the state-and-local-taxes deduction as it plays out in real estate markets in Northern Virginia and the rest of the country.

    • The new tax law will put pressure on state and local governments to moderate tax increases. It might be the push that forces them to address overly generous public sector pensions and move to what both the federal and Virginia governments have done – move from defined benefits to a hybrid plan. There will also be pressure to look at staffing levels.

      It will force them to take a hard look at the level of services they want to deliver to illegal immigrants. Some might even think about whether being a sanctuary jurisdiction makes sense.

      I did notice that neither Larry nor Les addressed the AT&T announcement.

    • US real GDP growth materially underperformed historical averages during the entirety of the Obama Administration. Obama never succeeded in returning the country to prosperity after the 2008 recession. Ronald Reagan, Bill Clinton and George W Bush all righted the ship after downturns. Obama never could do that. In fact, the real GDP growth of 2016 at 1.6% is pretty appalling. There is plenty of room for additional growth.

      https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/

      Unemployment is an increasingly useless statistic. The better statistic is the employment rate of working age Americans. As I’m sure you know, the nearly fraudulent modern unemployment statistic stops counting you as unemployed if you are unemployed too long or if you give up on finding a job. In this world of automation there is plenty of labor capacity available for GDP to grow at 4% for some number of years to come.

      • re: ” Obama never succeeded in returning the country to prosperity after the 2008 recession. ”

        DJ – can you tell me what has happened to the stock market and unemployment rate during that “failure” to return the country to prosperity?

        How do you increase the growth rate and GDP when you are at full employment and the Corporates are flush with money?

        • There is a big difference between the unemployment rate and being at full employment. Far too many people dropped off the unemployment rate’s denominator over the past 10 years. If you want to know if we are at full employment you have to look at working age Americans currently in the workforce (at full time).

          However, we’ll soon know. US GDP growth for 2016 was a paltry 1.6%. By your Obama-excuse theory there is no way it can increase because the US is at full employment. When the 2017 numbers are released we’ll see whether you were right or not.

          • Reed Fawell 3rd

            Rippert says –

            “In this world of automation there is plenty of labor capacity available for GDP to grow at 4% for some number of years to come.”

            Rippert is right again.

            Absent some Act of God or War, Trump’s Train now is headed for 4+% GDP driven by new found levels of consumer and commercial confidence that are turbo-charged by new Technologies that find and/or create, access, and unleash unheard of pent up demands.

            This is a New Age we are living in, one with altogether new possibilities and dangers. The Obama Era and its negativism are now being left in the dust at warp speed.

          • that may be but it’s ALWAYS been measured that way … all along. We did not suddenly start using different measures. Go look at u3 and u6 for all the past years… Not only that u3 and u6 track each other.. and for decades back full employment relative to GDP ..

            but the bigger question is – if we haven’t squeezed out that gap between unemployment and workforce participation before… what have we done to change that? You’re talking about folks who are at the margins … don’t necessarily have to or want to work and if even if they wanted to probably don’t have the education and work skills desired.

            we are essentially at full employment and the stock market reflects a healthy economy and a healthy corporate world.

            This tax cut is basically a temporary stimulus for workers and an attempt to make American companies more competitive… but again the stock market seems to say that they are already successful competitors. Please note that major companies like GE have paid no taxes so many corporations have found other ways to get around the actual rate…

            Our problems are with our workers – two fold. Companies cannot find enough educated/skilled workers in the US, so they either do HB visas or open subsidiaries overseas to get those workers – and yes the labor price of even highly skilled workers is set globally – we cannot pay high tech workers here more than what that same worker might get with competitors overseas.. more than just manufacturing has been affected globally .

            on the other side – low skill labor has driven many industries to countries with much lower labor costs.

            Every country is affected by globalization and every country would like to protect their own industries and labor force by controlling the exports and imports… when they do this – countries start retaliating and the result is that prices go which means workers paychecks don’t go as far as if prices were lower from globalization.

            Giant container ships have changed the economy – of the world – for those countries that do trade …

            It’s bad for low-skill US workers but it’s good for people in other countries with 10 times lower standard of living.

            All things considered… American companies have already found ways around the statutory tax rate… smaller domestic companies .. many that as “pass-through” have not and they WILL benefit from this tax change.

            I am not convinced we can grow at a much higher rate. We are a more mature economy and we have an aging workforce. The countries that have high rate GDPs are countries whose economies are typically not mature yet and they tend to have younger populations.

            We’re not done with the changes.. by the way… the second shoe is going to be the entitlements… and I’m thinking this might be the Kamikaze Congress because they know they have a tiny window to make changes that they believe have to be made – even if it costs some of them their elections… that’s worth watching…

      • RE:
        ” US real GDP growth materially underperformed historical averages during the entirety of the Obama Administration. Obama never succeeded in returning the country to prosperity after the 2008 recession. Ronald Reagan, Bill Clinton and George W Bush all righted the ship after downturns. Obama never could do that. In fact, the real GDP growth of 2016 at 1.6% is pretty appalling. There is plenty of room for additional growth.”

        Compared to what? What if the way the economy “works” and our declining workforce and expanding retirement is part of what is going on like we see in other countries with similar aging populations?

        There is nothing material than any POTUS can personally do to affect the performance of the economy anyhow other than try to convince Congress to take some actions and even then it takes months, years for some actions to have a material effect. It took years for the small stimulus that Congress passed although the rescue of the auto companies was immediate.. and had it not.. we WOULD have had a depression.

        The economy DID underperform but on the other hand it did improve every single quarter from the time of the collapse and subsequent bail out of the auto companies and stimulus like the make-work-pay credit.

        I just think that period of time was so different you cannot really compare it to prior times. automation and an aging workforce are major changes.

        “Unemployment is an increasingly useless statistic. The better statistic is the employment rate of working age Americans. As I’m sure you know, the nearly fraudulent modern unemployment statistic stops counting you as unemployed if you are unemployed too long or if you give up on finding a job.”

        fine but if you want to actually compare fairly do pick A statistic and do apples to apples.. Is the “better statistic” the one you’re going to now measure?

        You’re going to find that people no longer looking for work are in the 40-65 age group who do not have sufficient education to compete against younger workers AND they need health insurance which is basically like a huge tax on companies.. One guy with a chronic illness can affect the the cost of heath insurance for other employees and in turn the employer.

        One of the lesser acknowledged things that Obamacare has tried to do is provide large multi-company health insurance pools for smaller companies…to spread out their risks and moderate their costs. Why haven’t the GOP done that to help smaller businesses instead of repeal and no replace?

        Health insurance is the big drag on the economy.. whatever little productivity gains employees might get – it immediately gets sucked up by increasing health insurance premiums and the ironic thing here is that by killing the mandate.. it actually hurts non-Obamacare insurance -not Obamacare itself where the subsidies increase when the prices do. This is going to affect those who have other insurance other than Obamacare!

        ” In this world of automation there is plenty of labor capacity available for GDP to grow at 4% for some number of years to come.”

        In a traditional 20th century economy without automation – yes.

        Automation reduces the need of human labor, and has fundamentally changed what companies do. If they get more money – they’re going to build new plants that are even more automated and need even less human labor and the double-down by putting those new plants in places like Mexico.

        Is Trump and Congress going to punish GM for building some of the same model cars in Mexico as Detroit as a way to “save” jobs? Hey, you’re the one that says govt basically screws up on trying to regulate.. a dollar short and a day late from what is actually playing out in the economy?

        It’s the competition WITHIN the industries that drives the automation. Companies that use more labor than their competitors making the same product – LOOSE… whoever makes the lowest price widget- WINS.

        That’s why Toyota, GM , Whirlpool, Carrier …etc.. have put new automated factories in Mexico.. that use LESS labor than US plants and the labor they use costs them less than half of what US workers cost them AND it’s the govt that provides health care in other countries – not the corporations.. If you want to seriously look at corporation costs for labor – it’s the health care “benefit” that drives up US corporation costs compared to overseas competition.

        Are we going to put health insurance tariff on auto and other imports to balance the playing field for US auto makers and other manufacturing?

        Corporations were not paying the statutory tax rate anyhow.. Corporations like GE were famously shown as examples of a corp that paid NO taxes at all because it so successfully exploited other tax provisions. Almost no corporations were actually paying the statutory rate and instead exploited tax provisions.

        Having said this – the tax-cut – is really a temporary StIMULUS paid for with deficits… and will sunset for individuals …. will it increase GDP – permanently if not renewed? Would you continue it if it just added more and more to the deficit and debt? it’s a pretty big gamble – and it has a big downside… downstream also..

        that increased money MAY get spent for more “stuff” in the economy but since it comes monthly in paychecks, increased health care costs will eat some of it and the rest may well go into 401Ks for the better off who already have all the “stuff” they need.

        these “cuts” will not show up in paychecks right away because the tax changes do away with personal exemptions which was the basis for determining withholding… which means employers will have to find a new way to determine how much to withhold.. and chances are they’re going to continue to withhold what they did before until they figure out what the new withholding should be.

        Keep in mind – that the govt IS FUNDED as DJ no doubt knows, by quarterly payments from employers to the IRS… that’s how the US actually pays it’s bills…. pays it’s military.. and Medicare… from those quarterly checks from employers!

        • “The economy DID underperform but on the other hand it did improve every single quarter from the time of the collapse and subsequent bail out of the auto companies and stimulus like the make-work-pay credit.”

          2.6% US GDP Growth in 2015. 1.6% US GDP growth in 2016.

          Facts are facts Larry.

  12. I have a few quibbles regarding the capping of state and local taxes at a certain limit. First, it fails to recognize cost of living differences. High density, urban living is an expensive proposition whether Jim Bacon wants to admit it or not. Real estate costs and density in the US seem highly correlated. Of course, the way you manage that density is expensive as well. You have to somehow provide affordable housing by taxing the upper quartile so you can fund the lower quartile. Mass transit never seems to cover its own costs but becomes absolutely critical to high density living so it needs to be subsidized. Hence more taxes.

    If this tax bill pushes people out of high density urban living back into low density ex-urban living I see it as counter-productive.

    I wonder what work arounds (i.e. loopholes) exist. Are sales taxes affected? Could Virginia lower the income tax but raise the sales tax? What about “usage fees”? Could Virginia start charging everybody (yes, Jim, even those of you in Richmond .. gasp!) a VMT fee for every mile driven? While I don’t think that would be deductible it would allow a reduction of other taxes. If taxes aren’t deductible than fees for what you actually use seem more attractive to me.

    Finally, if the real estate values in NoVa drop by 10% what will that do Virginia’s nearly criminal school transfer fees (forgot the official name)? Aren’t real estate values a big part of calculating how much the Thundering Herd of Corruption in Richmond can bilk out of NoVa to fund schools in places where people refuse to move for employment opportunities because it’s inconvenient?

    • the reduction of SALT is going to cause a loss of tax revenue to many cities and towns that use that money to provide services…

      TMT thinks cutting those things will be a “good” thing.. eh… maybe not.. we’ll see..

      it may well cause great angst at budget time… and ultimately cuts in personnel.. because personnel costs are about 80% of the budget.

      on the pensions .. I saw an interesting thing the other day that TMT might find interesting..

      basically PGBC charges premiums for companies that have pension plans and the premiums increase if the pensions are under-funded:

      https://www.mwe.com/en/thought-leadership/publications/2015/12/increase

      I wonder if such an approach should be used for public pensions?

      • Larry, the PBGC requires all companies with qualified pension plans to pay for some insurance that protects pensioners and workers to some degree should their pension plans go bust. It’s a reasonable thing to do in a complex economy. It strikes me that it sets a floor on traditional pensions. And in most cases, the floor is not that much compared to the original plans.

        But why would anyone want his/her state or local government to share the risk of other states’ or localities’ public sector pensions from going bust? That would encourage even more reckless pension plans and penalize state and local governments that have taken some action to fix their big pension liabilities. As it stands, state taxpayers in Virginia are at risk for shortfalls in pensions for state employees, and local taxpayers are at risk for shortfalls in pensions for local employees, whether they are in the VRS or in local plans.

        But everyone also needs to keep in mind that government pensions can go into bankruptcy. When they do, there is no guarantee pensioners and vested workers will get any special treatment. So it’s in everyone’s best interests for state and local governments to move away from defined benefit plans to defined contribution plans or, as with the Commonwealth, hybrid plans.

        • that’s a good point TMT… but you could do it by state…. so for each state – the higher the percentage of unfunded pensions – the higher the insurance premium… right?

          that would encourage school systems and localities to more fully fund their pensions …

          part of this is already on the way because GAPP rules now require localities and school systems to reflect their total liabilities for pensions as well as other post retirement benefits like health insurance.

          • I (and many others) would fight any attempt by Virginia to set up a state plan to bail out local pension obligations. Today Fairfax County taxpayers are on the hook for: 1) VRS obligations for state employees based on the percentage of state taxes paid by residents of, and businesses in, Fairfax County; 2) VRS obligations for FCPS teachers and other covered employees based on their specific funding requirements; and 3) all local pension obligations. But we are not liable for anything else.

            And frankly, I don’t really care about the pension obligations of other local jurisdictions in Virginia. And why should Fairfax County residents and businesses be given more potential liability?

  13. Also relates to Dominion rate freeze such that our GA, and Governor (let’s be honest), in their infinite wisdom, have locked in higher profit margin for our Va. electricity. We need Dominion to give Va. a fair profit margin. If elec gen costs are cheaper here in Va., we need to be able to take that dividend to reduce the overall cost of living in Va.

  14. DJR, LG, thanks for a good discussion — read the whole thing this morning and by now it’s OBE but want to say that much. Certainly there is much to think about given the passage of this Bill.

    The overriding problem is that it makes no sense to stimulate the economy the way this tries to do, at the cost of a deficit increment that will more than undercut any long term benefit, IMO. I’m not sold on “pays for itself.” If there was a feel-good, confidence-building, popular enthusiasm element to this maybe it could have a positive impact anyway, but we’re reading that it starts out with 2/3 disapproval from the public.

    The two aspects that particularly stick in my craw are taxation of endowments and removal of the individual health care ‘mandate.’ Even the latter wouldn’t bother me if there were a comprehensive alternative health construct in mind; but this will simply aggravate the pricing chaos in the private insurance markets, with a lot of people falling through the cracks, which seems likely to cause a surge in popular support for a government-run single-payer solution, which is exactly what I think we ought to be avoiding. What the real estate impact will be on urban living and sprawl is well worth considering. Cutting business taxes is long overdue, and welcome, except that the policy need for such a huge cut hasn’t been sold worth a damn to the public. On the contrary, railroading it through with partisan tactics at reckless speed has aggravated the ill-will all around.

    From the political point of view, it seems to me that all this political mayhem accomplishes is to erode the GOP’s popularity just as the nation heads into the next census and redistricting cycle. Really, the question hangs there for us all to answer: is this the only way Congress could have got anything done? Is ‘regular order’ government dead? One of you says, “I say the same thing about this tax reform package as I said about Obamacare – at least they did something.” Let’s hope that, like Obamacare, the other party doesn’t merely trash it for political advantage rather than try to make it work.

    • Your craw may recover a little. My understanding is that the taxing of endowments was taken out be the US Senate prior to the revote. I am pretty sure but not positive.

      This bill did 3 things:

      1. Lowered the top corporate tax rate.
      2. Ended the Obamacare mandate.
      3. Somewhat simplified the tax code for individuals.

      The first two are important.

      1. The top corporate tax rate in the US was too high. However, a lot of big corporations never touched that rate because they used complex offshore tax avoidance schemes with names like “double Irish with a Dutch sandwich” (I am not making that up). Small companies didn’t have access to these schemes because it means flipping profits from country to country. One hopes that the smaller companies will benefit from this and will use the money for some good. The obvious follow on is to start killing off industry specific corporate tax loopholes under the theory that the top rate is no longer onerous.

      2. Obamacare was a plan that was designed to fail. Under the “never waste a crisis” philosophy the failure of Obamacare would trigger a crisis that would be solved by nationalized medicine. The righties want to kill Obamacare before it becomes a crisis and therefore avoid the forced march to nationalized medicine. However, as Larry often points out, the righties know that healthcare is a mess in America and they have no credible alternative plan to Obamacare other than “let the free market decide”. The free market, of course, will allocate health care the same way it allocates caviar – to those who can pay. Many find this unacceptable. Let’s see if The Donald and his band of merry men (and women) can come up with a workable alternative to Obamacare.

      3. This simplification idea was kind of on the right track when the rates would be lowered and some big deductions would be eliminated. A step on the long journey to a much simplified flat of two / three / four tiered regime with few to no deductions. However, Congress being Congress, the original idea was lost and eliminated deductions were replaced with caps, etc. A for effort, F for results.

      • re: ” 3. This simplification idea was kind of on the right track when the rates would be lowered and some big deductions would be eliminated. A step on the long journey to a much simplified flat of two / three / four tiered regime with few to no deductions. However, Congress being Congress, the original idea was lost and eliminated deductions were replaced with caps, etc. A for effort, F for results.”

        Doubling the standard deduction will take a large number of folks out of the itemized deductions which basically is what many in the middle class use to lower their taxes especially with charitable deductions which are more than likely going to be adversely affected.

        taking away the exemptions actually complicates things even more because those exemptions are how employers determine how much to withhold… on the w-4… now.. if you have 3 kids and one is older and in College – you no longer get a 4k exemption… and that means ..compared to others with no such kids.. you’re 4k in the hole .. that’s $800 in taxes of which I think you get a $500 credit instead… oops.. that’s not good.. and what if mom is living with you… that’s another 4K exemption turned into a 500 credit…

        so simple it is not.. it’s actually far more complicated … if you have 3 dependents.. try to figure out what happens at tax time as well as how much you should be deducting per paycheck. there is no easy way to do that other than laboriously going through the calculations on a per taxpayer basis… that’s going to replace the relatively simple “put how many exemptions” in the box on the w4.

        I predict you’re going to see more changes.. AND that we’re going to see the annual deficit – double..

        because this is basically a stimulus to try to boost the GDP rate.. and no one scoring it – govt or private sector is coming up with what the true-believers say it will.

        Finally – I think most folks are basically opposed to tax cuts if they are provided by adding to the deficit/debt.. it’s just is wrong. But the GOP true believers – do believe that those cuts will lead to increased revenues no matter what the CBO says. They used to have something called PayGo and every tax cut had to be matched by some cut in spending and all that has apparently got thrown out the window.

        • “Doubling the standard deduction will take a large number of folks out of the itemized deductions which basically is what many in the middle class use to lower their taxes especially with charitable deductions which are more than likely going to be adversely affected.”

          Larry, this doesn’t make sense. If the standard deduction is set at $24 K, rather than $12 K, everyone who has less than $24,001 in deductions comes out ahead. That is a lot of people in the U.S.

          • TMT – some people give a LOT of money to charities and others have chronic health conditions that they essentially use to reduce their tax liabilities to zero.

            The other issue is the exemptions.. 4K per.. and they’re gone…and that means that a taxpayer with a 20 year old student or someone taking care of a mom or other family member.. won’t get those deductions…only the child tax credit for under 17 and then $500 per other family dependent.

            On balance.. most will actually get lower taxes… but there are some winners and losers.. you can’t really change the tax code without that happening…

            still a skeptic it will pay for itself…. Reagan did that and then had to increase the taxes again because it was increasing the deficit.

            what you’re going to see here if we don’t see it pay for itself is folks who will say “give it a chance”… don’t stop it yet.

  15. Obamacare has not failed.. Signs-ups this year are almost as high as last year with the sign-up time cut in half!

    If it were a real failure – people would never sign up for it unless they had no other alternative – which is the reality – that the “Obamacare is dead” folks fail to admit.

    The reality is that all the folks who say it is a failure – don’t have a clue what would be better… and that includes most of the politicians ; it’s more of the ” kill it now and we’ll figure out what to do later” mentality that is in vogue with the uber-frustrated who want simple answers and don’t want to hear that something is actually complicated and requires some level of intelligence to actually come up with something that works.

  16. Merry Christmas you guys!

  17. Q: What’s the difference between Democrats and Republicans?
    A: Democrats increase the national debt to give money to the poor. But Republicans increase the national debt to give money to the rich.

    Happy New Year!

  18. To clarify my previous comment, I have no objection to lowering tax rates. I have a problem with increasing our debt. And with the arguments used to sell the program.

    I think I’ll focus on economic growth for now.

    I was wondering if someone could identify which industries will actually drive GDP growth and job growth now that corporations are getting a tax break?

    Some industries must have greater potential, but which?

    Our major banks, for example, typically are taxed at over 30%, compared to the average corporate rate, actually paid, which is under 20%. So they will enjoy the benefit of the tax cut. Is someone really suggesting that taxes have been holding Goldman Sachs back from expansion?

    Similarly with telecoms. AT&T, for example, is taxed at a rate over 30%. Again, they should fully benefit from the tax cut. They boldly announced that they would increase their capital spending in 2018 by $1 billion, roughly half of what they will save on taxes, which I suppose is something. But this is a company that spent $22 billion on capital expenditures in 2016. Is this level of increased investment really going to increase GDP growth by a percentage point? (I will merely note at this point that Mulvaney has stated that we are already nearing 4% growth, even without the tax cut).

    The corporate tax break will certainly help shareholders; it already has. And based on the surge in stock prices, there can be little doubt how shareholders expect the tax cut to be spent.

    Again looking at AT&T, based on their public announcements, it looks like they plan to give about half of their tax cut back to shareholders. Along these lines, it is worth noting that their 2016 Annual Report boasts that they paid out to shareholders 70% of the free cash that they generated, about $12 billion out of $17 billion. To point out the obvious, they could have held onto an additional $1 billion of their free cash to make the investment they claim is the benefit of the tax increase.

    If anyone sees economic growth in this scenario, I’d like to understand where it will come from.

    In the meantime, we still need to pay for the goods, services and transfers purchased or provided by our federal government. Plus increasing our funding for the military. Plus increasing our funding for our infrastructure. Plus, plus, plus.

    Happy New Year.

  19. I’ve heard a lot of whining from multiple sources that the corporate rate cut may just go to big shareowners in dividends. If one looks at the facts and thinks a bit, a winning argument can be made that the higher post-tax earnings from the corporate tax rate cut if not invested in capital or labor, but all paid out in higher dividends, will be taxed at a higher rate than the same dollars were taxed under the existing law.

    Assume a company has net income of $10 M after all tax deductions and credits. Under the present law, $3.5 M will be paid in federal taxes. Under the new law, the tax bill falls to $2 M. Now let’s assume that all of the additional post tax earnings of $1.5 M is paid in dividends as many on the left bemoan. And to keep the example simple, further assume all of the shareowners are individuals or qualified mutual funds that pass earnings through to their shareholders. Obviously, mutual funds are not taxed. Their owners are.

    Because of the double taxation of dividends (once as corporate earnings and one as taxable dividends), I believe federal tax revenue will be higher than under existing law. As I understand the new individual tax brackets, anyone with income above $38,700 will pay a tax rate of at least 22%. For married couples filing jointly, the 22% tax rate cuts in at $77,401. I strongly suspect that the bulk of corporate dividends either directly or passed through by mutual funds go to people who are in the 22% or higher tax bracket. And the total tax on those dividends (corporate and individual) will be higher than the 35% under the old law. 20% plus 22% is greater than 35%.

    Don’t expect to see this in the MSM. It’s contrary to their political agenda and also likely sails over many journalist’s heads – most especially those in on editorial boards. We live in a real world, not a Washington Post world.

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