Posted on 09/17/2016 4:19:33 AM PDT by Kaslin
Fifty-four years ago, at the Economic Club of New York, President John F. Kennedy unveiled a dramatic tax-cut plan to revive the long-stagnant U.S. economy. He proposed lowering marginal tax rates for all taxpayers and reducing the corporate tax. He advised lowering the top tax rate from 91 to 65 percent and closing tax loopholes. Five times during the speech he used the word “incentives.”
In perhaps the most famous line from that path-breaking speech, he said: “In short, it is a paradoxical truth that tax rates are too high today and tax revenues too low, and the soundest way to raise revenues in the long run is to cut rates now.”
Kennedy had already in 1962 lowered investment taxes on business. And after his tragic assassination, his broader tax proposals were passed into law in early 1964. And they worked. The U.S. economy grew by roughly 5 percent yearly for nearly eight years.
Almost 20 years later, Ronald Reagan launched a 30 percent tax-rate reduction to save the economy from the high-unemployment, high-inflation 1970s. Reagan acknowledged many times that he was following in Kennedy’s footsteps. Under the Gipper, tax rates were slashed from 70 percent to 28 percent, corporate taxes were cut, and numerous loopholes were closed.
And the American economy grew mostly between 4 and 5 percent annually for over 25 years.
By the way, both men, Kennedy and Reagan, followed a simple growth model of what I call tax cuts and King Dollar. Both men also reached across the aisle to garner bipartisan support for their plans.
This past week, Donald Trump went a long way toward joining their ranks. Speaking before the Economic Club of New York, he delivered a positive, optimistic growth message that falls squarely inside the JFK-Reagan model.
“My economic plan,” he said, “rejects the cynicism that our labor force will keep declining, that our jobs will keep leaving, and that our economy will never grow as it did once before.” Optimism.
He established a goal of 4 percent economic growth, which would double the stagnant rate of the past 15 years. The centerpiece of his plan is a reduction in business tax rates for large and small firms to 15 percent from the current uncompetitive 35 to 40 percent. He offered immediate expensing for new investment and a 10 percent repatriation rate to incentivize American firms overseas to bring $2.5 trillion home.
High business taxes are the biggest obstacle to a return to rapid economic growth. Abundant research has shown that the best way to raise wages and create jobs is to slash business taxes. Within five years a business tax cut will pay for itself, and then some.
Importantly, Trump plans to reduce individual tax rates with three new brackets of 12, 25, and 33 percent. He would cap deductions for the wealthy and close special-interest loopholes. Middle-income wage earners will be the biggest beneficiaries of these reforms. To cap it off, he will roll back out-of-control regulations, unleash American energy, and abolish the Obamacare failure. Following the successes of the JFK and Reagan tax reforms, Trump’s strategy is likely to generate 4 to 5 percent growth over time. A rising tide will lift all boats.
The contrast between the presidential contenders could not be starker. Hillary Clinton would raise taxes on so-called rich people, corporations, capital gains, financial transactions, and inheritance. Has there ever been an example where America has taxed its way into prosperity? Never.
Trump has an economic-recovery-and-prosperity plan. Clinton has an austerity-recession plan. Historically, in presidential elections, the optimistic growth plan nearly always wins.
That said, Trump’s view of monetary policy, especially the dollar, needs to be resolved. At the Economic Club of New York, he charged that the Fed is being “totally controlled politically.” Elsewhere he has stated that Fed chair Janet Yellen is keeping interest rates ultra-low in a political effort to boost Democratic fortunes. I disagree.
Yellen doesn’t control the Fed monolithically. And the real debate about interest rates is going on inside the Fed.
True enough, the Fed needs radical reforms. In particular, it needs to replace its failed forecasting models and be rid of the academics who overwhelm the Fed system. But as New York Sun editor Seth Lipsky has taught us, the best way to depoliticize the Fed is to develop a standard of value to make the dollar strong, reliable, and stable. In other words, a monetary rule. JFK and Reagan’s growth model included tax cuts and a steady dollar. Trump has taken a gigantic step toward restoring prosperity with his tax-cut centered fiscal policy. Hopefully he will soon turn to a sound-dollar policy to bolster the growth impact of lower tax rates and regulations.
And hopefully then he will pound away on all this on the campaign trail.
More tariffs and less income taxes.
Lower income taxes and lower tariffs. (Too conservative for you, I know).
ping
We can lower tariffs as soon as we get rid of environmental, regulator and labor laws, but not before. Otherwise you’re just allowing companies to skirt them and undercut American production and labor. Besides, we basically have no tariffs so it’d be difficult to lower them - it’s like 1% of federal revenue today (vs 40-90% before the income tax added).
Even after our own country went through massive labor upheaval and environmental challenges as we industrialized? Do as I say, not as I did? I don't think that's the kind of argument that will resonate. Hypocrisy has a way of working against you.
You can't vote in these required massive expenses for US companies and say these regulations and laws are important! You have to follow them!.... But only if you are US based companies. Non-US based companies need not apply to these massive costs we're handi-capping US companies with because we've determined they are very important to (Labor, environment, ____).
It's hypocritical to say these regulations are so important we're going to require them...but then let any company of any size complete skirt them by going overseas and completely cutting out the US labor and environmental regulations. I'm not demanding other countries adopt - that's what a tariff is for - besides a tariff on outsiders makes far more sense than taxing the US base - more than half of our budget was paid for the first 130 years of the country by tariffs. It's similar to hotel taxes. Why tax your citizens first when people visiting from out of town can just pay a massive hotel tax to cover a lot of the burden. We're doing the opposite with just 1% of our income coming from tariffs - which is roughly a 1% tax on imports. Why do we tax US companies 35% and even Trump's plan is only 15% but tax imports at 1%? Makes no sense.
Tariff on outsiders? If the Feds placed a $50 a barrel tariff on imported oil, who would pay the tax?
I didn't say they were important. Big government did. I hate big government. So instead of taxing Americans more, when they are already overtaxed, I would demand that government be forced to confiscate less of our money. At the same time I would argue that government should have much less influence over what free people freely choose to purchase, and who they choose to purchase from.
...but then let any company of any size complete skirt them by going overseas and completely cutting out the US labor and environmental regulations.
Instead of making American consumers pay more, and allowing government to take more of our money while becoming more powerful, perhaps we should reduce the size and scope of government so our industries can better compete. That sounds like a conservative solution to me.
Ah, of course you use oil rather than any number of other products. The cost of increases is split between consumers, workers, other countries, and Corp profits. Based on what has happened over the last 30 years it’s safe to say most would come out of Corp profits. Look, I’m all about free trade but it makes zero sense to put massive costs on US businesses and then allow MNCs to skirt them. It also makes zero sense to tax imports 1/35 the tax on US corps. Cut us taxes and regulations and then we can talk about imports. But imports should always be last, just like they were for the first 135 years of our countries existence.
BFL
We have a debt we need to pay, a deficit current and a budget to fill. If you have three choices to cover those which do you pick first: rank and file tax payers, US corps, imports. The logical answer is imports should be taxed first, and US last just like we had for 135 years. Add in the required regulatory, environmental, and wage cost regulations and imports should still be 40-60% of our taxes collected like it was for most of our countries history
After we agree on who pays the oil tariff, feel free to pick another product.....and explain why it would behave differently.
The cost of increases is split between consumers, workers, other countries, and Corp profits.
I agree with 1,2 and 4. How would other countries pay if the US government put a $50 tariff on imported oil?
Based on what has happened over the last 30 years it’s safe to say most would come out of Corp profits.
Why?
It also makes zero sense to tax imports 1/35 the tax on US corps.
Not sure I agree with your math here.
You offer false choices. I choose, instead, to starve the beast by eliminating all tariffs, reducing the federal income tax to 15%, and cutting the corporate tax rate by half. The federal government will have more than enough income to meet their needs when we experience 4%+ annual GDP growth for decades to come.
Again, why would you tax imports at a lower rate (currently 1%, you suggest 0) than you would US wages (15% your suggestion) and US for taxes (17.5% fed your suggestion)? I’d much rather have 20% import tax, 10% us income tax and zero Corp tax rate. That would get gdp growth rate much higher than your scenario would.
I wouldn’t use for a few reasons.
1) Oil is nearly perfectly inelastic, especially in the short and medium term (< 5 yrs). A 50% increase or decrease in price barely moves demand – maybe 1% change in qty demand. A typical good in the consumer market is elastic, meaning a 50% increase or decrease in price would have a change in qty demand by at least 50%. As such, if oil demand shifts outward by 1-2% (or oil supply shifts in) causing a shortage and prices go up 100%, nearly 100% of the increase goes to the producers pockets and 100% comes out of the consumers profits (like what we saw in 2005-2007). Conversely, if oil demand shifts down (or production shifts out) by 1-2% causing an oversupply (like we have now), oil, consumers get nearly 100% of the gain and producers lose 100% of the gain. That doesn’t happen with any other market or product for a number of reasons
2) Most other products have alternatives. Oil – at least for a huge number of years and probably massive government infrastructure investments notwithstanding, doesn’t have a good alternative, despite Obama’s insistence that there are. This is what causes that massive inelasticity. Most products have a huge number of alternative goods.
3) Revenue is divided into several pieces: material cost, labor cost, overhead cost, marketing cost, transportation cost, among others and of course profit. If the cost of labor goes up (eg: import tariffs, new labor contract, min wage, etc), due to alternative products on the market and the demand curve, producers may or may not be able to charge more for the product (ie the cost is increase is born by the consumer if they can pass it on, it is born by the owner if not, most of the time it is split). Additionally, many companies will try to offset labor costs first by other means (acquire material cheaper, reduce transportation costs, reduce overhead, etc) before raising prices which shifts the costs to third parties. In short – the cost is not always born by the consumer. Having worked at HQ in FP&A for a supermarket chain for 4 years and on the ops side of that business for 9, I can guarantee you that nearly all labor cost increases/decreases were born by the corporation (us) and cost increases/decreases for the product varied and was usually mixed (eg: cost of coffee skyrockets by 70%, margins fell from 70% to 50% even with a 10% price increase which resulted in a 25% demand decrease – ie most of the cost increase was born by us, same was true on the reverse). In short, businesses cannot always “raise prices” and force consumers to take price increases due to cost increases.
4) This scenario is static. Real life is not static. A theoretical increase in demand in labor in the US due to tariffs is almost immediately spent back into the US economy, boosting velocity of money, which boosts GDP. Shift $$ overseas for production has the opposite effect for the US and a positive effect on velocity for the other country
Not sure I agree with your math here.
We import around $3 trillion per year and collect $30 billion in tariffs. That's a tax of 1%. We tax profits on US corporations at 35%. Assuming average profit margin of around 30%, the equiv is probably closer to 10x but still makes no sense to tax US corps more than imports.
Create jobs where? If you slash business taxes will Carrier create jobs here or in Mexico? How about Ford? Will HP create more jobs in India or will they use the savings for dividends and stock buy backs? Will Mylan use the increased profits to lower the price of Epipens or to buy another pharmaceutical company and cut jobs?
It's a different world from Kennedy or even Reagan. It's a global economy now, where corporations focus solely on stock prices for the quarter. They will continue to send jobs overseas when they can. And I honestly don't see how Trump can halt that.
U.S. consumers, not outsiders, would pay the oil tariff. Agreed.
(eg: cost of coffee skyrockets by 70%, margins fell from 70% to 50% even with a 10% price increase which resulted in a 25% demand decrease – ie most of the cost increase was born by us, same was true on the reverse).
Yes, a 70% tariff on coffee would be paid by US consumers and US businesses, not by outsiders.
We tax profits on US corporations at 35%. Assuming average profit margin of around 30%, the equiv is probably closer to 10x
Corporate profits last year were about $1.7 trillion. I think your 30% average margin is way too high.
On oil yes; on other products the profits of exporters into the US would have to drop for them to stay competitive so outsiders would share in any pain (or lose the profit entirely, which helps US labor and businesses)
Yes, a 70% tariff on coffee would be paid by US consumers and US businesses, not by outsiders.
See above - that isn't true. If you charge a tariff on coffee, the demand for it drops and exporters would have to lower prices in order to drum up demand. It's not exactly 1:1:1 but the loser would include the overseas producer as well. Put another way, the profit maximizing price charged by that exporter changes with a tariff, and it's not 100% of the change in cost and not always in the same direction.
Corporate profits last year were about $1.7 trillion. I think your 30% average margin is way too high.
I was mentally thinking EBITDA rather than NI but yes that is too high, although corporate profits before taxes is closer to 2.2T - that also excludes a lot of corporate profits "hiding" overseas (like Apple) so the real profit is probably closer to $3t before taxes. But regardless, it makes no sense to have US corporations paying nearly $400 billion in taxes and importers paying only $30 billion. All things being equal, I'd much rather do like we did for our first 150 years of our existence and live of import tariffs than tax our own citizens first (many local places still do this with hotel taxes). Of course, I'd rather we just massively reduce the size of our government but that isn't going to happen anytime soon.
Yes, a 70% tariff on coffee would be paid by US consumers and US businesses, not by outsiders.
See above - that isn't true
Ummmm....the consumer saw a 10% price increase and the retailer saw a drop in profit. Neither are outsiders.
If you charge a tariff on coffee, the demand for it drops and exporters would have to lower prices in order to drum up demand.
That's possible, but not guaranteed.
It's not exactly 1:1:1 but the loser would include the overseas producer as well.
Tariffs cause losses on all sides? You don't need to convince me of that.
All things being equal, I'd much rather do like we did for our first 150 years of our existence and live of import tariffs than tax our own citizens first
Except for the belief that tariffs don't tax our citizens.
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