Tax Cuts, King Dollar & Growth

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.

Ummmm....the consumer saw a 10% price increase and the retailer saw a drop in profit. Neither are outsiders.

You missed the massive drop in demand/sold I mentioned? I don't understand why this is so hard for you. If the cost increase came from tariffs they would have been the ones hurt the most in terms of aggregate profit. If people don't buy coffee, they buy other beverages so the retailer (us in this case) didn't lose much, if any and consumers just shifted to other products (maybe not quite as much utility).

Here - I'll give you another example for Walmart (or pick your retailer) that is very realistic. Walmart buys widget toy X from China for $2.70 and it costs another $0.10 for distribution from their warehouses for a total cost of $2.70. The toy cost Chinese company $1.50 to make and deliver from China (total profit $1.20). The last time Walmart did a RFP, the cheapest US option for the same toy is $3.00. This toy retails for $5.99
Let's say the US implements a 15% tariff. That $2.70 with 15% tariff is now $3.10, a $0.40 increase. Would consumers see a $0.40 increase? No - Walmart can already buy for $3.00 from US production, which would make it a $0.30 increase. Additionally, The Chinese company has $1.20 in profit margin to play with rather than lose the entire business. The Chinese lower their sale price to $2.50 + tariff, now totaling $2.88 in aggregate to Walmart. Walmart is unlikely to raise the price above $5.99 so in this scenario consumers lost nothing, US taxpayers made $0.28 in tariffs, and Walmart lost $0.18, and the chinese company lost $0.20 compared to previous.

Except for the belief that tariffs don't tax our citizens.

It is a(n indirect) tax on citizens but again not all of that tax hits citizens, as my example above illustrates. It's still far preferably to a direct tax. For example in my scenario, the government could lower corporate taxes by $0.28 and thus you end up with US consumers with no change, walmart is net $0.10 cents (0.18 loss of GP + 0.28 gain on taxes) and the only loser is the Chinese firm.

You missed the massive drop in demand/sold I mentioned?

No. Not even a little. As shown by my comment.

"Tariffs cause losses on all sides? You don't need to convince me of that"

See?

I don't understand why this is so hard for you.

I'm still focused on your claim that something that raises the price I pay, is paid for by "outsiders".

That $2.70 with 15% tariff is now $3.10, a $0.40 increase. Would consumers see a $0.40 increase? No - Walmart can already buy for $3.00 from US production, which would make it a $0.30 increase.

Excellent example. Here, the $0.40 tariff raised the price WalMart paid by $0.30. Not an "outsider".

It is a(n indirect) tax on citizens

Yes, not a tax on an "outsider".

I didn't ignore anything. Your idea that only "outsiders" pay when we raise a tariff is ridiculous. You were wrong.

Glad that you admitted we would actually pay.

Yes, it would reduce some imports, harm some foreign producers and aid some US manufacturers while harming many more consumers.

That about cover what you felt I ignored?

Nice strawman. Where did I state that only outsiders pay tariffs? Ive already stated multiple times its usually split between consumers, domestic businesses and outsiders. In the case of other taxes it's only consumers and domestic business

Let's let's try a different approach. Assuming you aren't an anarchist, you agree that the government needs *some* taxes, right? There are only 4 ways to raise taxes of any significance. Personal income taxes, corporate income taxes, property taxes and tariffs. The first 3 100% of the burden is borne by US citizens. The last (tariffs) is partially borne by US citizens and partially borne by outsiders. Therefore, logic would dictate tariffs should be the first tax we add to cover the budget since at least some portion effects others (we could argue the % all day) and the other taxes last (which is 100% borne by US). For the first 150 years of our nations existence, that's exactly what we did. Today, just 1% of the federal budget and ~0.5% of taxes collected overall come from tariffs.

Where did I state that only outsiders pay tariffs?

I thought you said that in post #7?

besides a tariff on outsiders makes far more sense than taxing the US base

you agree that the government needs *some* taxes, right?

Sure.

Personal income taxes, corporate income taxes, property taxes and tariffs.

And sales taxes.

The first 3 100% of the burden is borne by US citizens. The last (tariffs) is partially borne by US citizens and partially borne by outsiders.

Outsiders suffer from loss of sales, sure. It's still Americans paying the tax.

Therefore, logic would dictate tariffs should be the first tax we add to cover the budget since at least some portion effects others (we could argue the % all day)

Tariffs aren't very good at raising revenue. The best ones would be ones you can't avoid. Do you agree? So one on oil could raise a lot of revenue, right?

For the first 150 years of our nations existence, that's exactly what we did.

Yes, everyone knows that tariffs and excise taxes on alcohol raised most of the revenue in our early history. If we could shrink the government by 90%, we could probably go back to that system. I don't suggest we hold our breath.

Sigh. Not all of the loss would be borne by US citizens. Some of it would come from margin compression from the foreign entity. Whether that’s 1% or 99% would depend on the item in question. You seem to think it’s closer to 0% would be borne by margin compression for the foreign entity. I think with the exception of oil, at least 40% would come from margin compression for the foreign company and we can use the taxes gained from the tariff to offset the higher prices by cutting personal and business taxes. I’m not suggesting we could raise $3+ trillion from tariffs, but I think we could probably pull our US corporate tax rate down to 0-5% with tariffs. And yes, I’d love for our federal government to shrink 90%.

I think with the exception of oil

What about the inefficiency of an oil tariff? We import about 8 million barrels of crude daily and produce about 9 million barrels daily. Any tariff will raise less than half the cost it imposes on crude consumers.

I’m not suggesting we could raise $3+ trillion from tariffs, but I think we could probably pull our US corporate tax rate down to 0-5% with tariffs.

How much $$$ would you like to raise with tariffs?

I agree, but as I already mentioned oil is nearly perfectly inelastic. There is nothing else in the world remotely like it today. Most goods that we import are elastic products with a massive number of alternatives products.

How much $$$ would you like to raise with tariffs?

Assuming income neutral, I'd eliminate corporate US taxes and make up the rest from import taxes - roughly 300 to 400 billion. This is also, ironically, probably the property size the federal government should be.

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