This post adopts the progressive media framing that the Trump tax cuts were a big giveaway to the wealthy, with only a token cut for everyone else (if that's acknowledged at all).
I have worked through numerous examples for different kinds of households and various levels of income, and I find that the tax savings for modest incomes are substantial. This is largely due to
* Doubling of the standard deduction (which swamps the elimination of the personal exemption)
* Reducing the marginal tax rates for all brackets except one
* Doubling of the child tax credit from $1k to $2k
One of the things that surprised me is that effective tax rates on income <$100k are objectively very low. Despite what you might hear from progressives, the federal tax code is super progressive. An across the board tax cut that still keeps the code quite progressive, why must this be characterized as unmitigated evil?
Moreover, as I was living in NYC at the time this legislation was passed, I personally saw a tax increase on my very high income, because of the new SALT deduction caps. Quite simple math would suggest that this outcome was experienced by quite a few high earners in high tax jurisdictions.
This idea that a significant benefit to a group should be written off because another group got a bigger benefit seems very suspect to me. When discussing student loan forgiveness, the progressive thought police were quick to point out that "I don't benefit" is not a reason to dismiss policy action, but apparently "I don't benefit as much" is?
Defense: Make our allies pay their fair share for global security. No more “cost plus” contracts.
Entitlements: Long term transition to private retirement savings, cash vouchers instead of Medicare, large estates repay Social Security and Medicare benefits.
Miscellaneous: End farm subsidies and corporate welfare. End funding for anything that is primarily state/local responsibility.
The problem is that interest rates are a very diffuse way to curb demand and, by extension, inflation, if that is your concern. Yes, borrowers are hit harder with higher rates, but even Ben Bernanke used to acknowledge the "fiscal channel" embedded in interest rates - i.e., higher rates generate more income and potential demand from savers. That might in part explain why the economy hasn't really slowed down all that much.
The big problem still seems to be the underlying economic distortions thrown up by Covid and the resultant shutdown that is still disrupting supply chains.
The esteem that trump had from good economic times cannot be overstated. The bulwark runs focus groups which reveal that many trump Biden voters would return to trump out of nostalgia for the pre trump economy.
I bet this is even more acute in rural America where the post crash recovery was slowest. “Trump fixed the economy” sounds ridiculous in Brooklyn. Rural America may remember the trump years as a rare bright spot in a long decline.
So Matthew is proposing that we pay off the debt while the economy is slowing down? I know the household accounting doesn't always line up, but I try to pay off debt when I am doing well, not the other way around.
Both parties these days are just trying to give free handouts. Democrats want a Scandinavian style safety net without their taxes, which is ridiculous. Republicans just want to cut taxes without touching spending. Both parties are so out of touch with basic math it is frustrating. I have to laugh a little when the subline is 'And a terrible time for a return to Trump's approach', when actually it is a terrible time to keep doing what the country has done for the last 23 years, both Democrats and Republicans.
Higher taxes have to occur, but the political will is just not there.
If you could really count of the Fed, any time would be a good time. Bernanke-Yellen really screwed up public understanding of macroeconomics by creating circumstances in which both inflation and employment were below target.
"Trump did a giant regressive tax cut, but still got to be a “populist” because domestic spending also went up."
It's worth noting that the domestic spending piece of this was highly contingent. Trump TRIED to do a massive welfare-state rollback (something the Biden campaign should remind voters in 2024). Thankfully he failed, and the Democratic House majority that resulted from this massively unpopular proposal helped increase domestic spending in 2019 and 2020. Trump ended up benefiting politically in 2020 from these circumstances but that's what happened.
The bottom line of this piece is correct- under present circumstances, Trump winning and doing another giant regressive tax cut would be bad. And it would ALSO be bad if he gets a big enough Senate majority to actually implement welfare state rollbacks, which a big GOP Senate majority will want to do!
We shouldn't overstate the macroeconomic case for Trump here. Unlike his predecessor, who inherited a massive crisis and turned it into a good economy with policies that were directionally correct, Trump inherited a good economy which turned into a really good economy. Some stuff he did surely helped at the margins, but in ways that were highly contingent - and the graph of job growth basically just continued its Obama-era trend through Trump's term until the COVID recession.
I think a good point. There is an exaggeration of the effect of policy and governance on the economy. To the extent that it does effect things it is often years later.
The ups and downs of the business cycles are not tied to the politics du jour.though it has some effect, and often the numbers that a president gets whether gdp, income, stock market, are often just whether you inherit the reins of government when it is down or up with regression to the mean a bigger factor than ones genius or ineptness.
Was Bush responsible for the recession? Did he invent credit default swaps and was responsible for the housing bubble? Was Obama and Trumps growing econmomy anything more than returning from the recession? Was Tump's very strong economy based on debt spending and living off the credit card, likewise Biden,
It's a great point that public opinion on the state of the economy generally overrates the role of the current President and massively underrates the role of the Fed. Monetary policy matters a LOT.
However, to make a sports analogy, Obama had what I think is pretty clearly a high "wins above replacement" value for the American economy. During his term, both his domestic opponents and quite a few of his international contemporaries were pushing for fiscal austerity. The fact that he managed to pass some fiscal stimulus was important. And as Matt recently wrote about, America doing some fiscal stimulus during the Obama years while there was austerity mania in the EU is a big reason why our economy is now trouncing theirs even though they were similar in size in 2008. If you want to know what our economy would have looked like had we chosen austerity instead of stimulus in 2009, look at a graph of unemployment in the EU - it didn't start going back down until 2013! Ugly stuff - the true villian of the Great Recession was Wolfgang Schäuble.
My main point was that Trump's "wins above replacement" value was a lot smaller than this. He inherited a good economy that turned really good but largely by continuing on the same trajectory, and some of the beneficial things he did were basically accidental / contingent.
Raising revenue is easy theoretically, if all the deductions in the tax code were eliminated, it would raise hundreds of millions to billions of dollars. The problem is all sorts of special-interest groups would be up in arms about this.
Healthcare costs will never get under control, when we have 60-65% of the population being overweight or obese, 10-15% of the population who smoke tobacco, and another percentage of people who have problems with alcohol or drugs, leading to conditions like hepatitis, HIV, emphysema, heart failure. All of the chronic diseases that kill people in developed countries, are directly caused by lifestyle factors. Japan's life expectancy is something like 84, meanwhile the US is hovering around 75-76.
I still don't believe those drugs are a cure-all, and because the drugs are so new, I wonder whether people keep the weight off or eventually gain the weight back, what the long term side effects are or could be, or whether the medications lose effectiveness over time.
No, deficit is taxes minus spending. Neither are more important than the other. Simple math. Both adding to taxes or reducing spending has the same effect. You can spend a lot as many countries do yet have little debt.
The limit to both spending and taxes is what may pass Congress which is political. Neither high taxes or cuts in spending are very popular and so that is where it stands. As already stated spending as a percentage of gdp has not changed greatly from 1950 until Covid, and I wouldn't take the last four years as normal, and I think we definitely overdid the Covid stimulus (eg paying people 150% of income when staying home).
Real after tax income has also consistently grown over the years, so this grievance that we are taxing ourselves to death is belied by the fact that we are doing economically better while at the same time caring for our increasing percentage of retirees and expanding healthcare for poorer Americans. In fact the gains in income of the upper quintile exceed greatly all the national gains, which is why I strongly would alter marginal tax rates so that our natural increases in wealth and income that come naturally with higher productivity
The original payroll tax was one percent. It takes ever more “contributions” to meet obligations to those at the top of the pyramid. I’ve gotten snapped at in this forum for calling SS a Ponzi scheme. But yes, it’s a Ponzi scheme.
Not a Ponzi which implies pay ins that cant cover pay outs. In a stable system SS could work fine and did for many years, the main problem now is that people live longer and have less children so the employed worker/retiree ratio has increased enormously. Not hard to fix but obviously would require higher payroll taxes or reduced spending and likely both. I favor increasing the cap on SS taxes while also increasing the eligibility age to reflect that people live and work longer.
The VAT had not been invented in FDR's day so he and Truman get a pass. But by Eisenhower's second term it could have replaced the wage tax. The big missed opportunities were when Medicare was created under LBJ and when SS was reformed under Reagan.
Yeh, no. It’s no more a Ponzi scheme that whatever bonds or stock are in your 401k. They all represent the willingness of future workers to pay for your retirement.
The stocks in your 401K represent (at least in theory) something tangible - business that are producing products and services and earning income. Social Security is zero value added, just transferring money from new participants to old participants.
But that’s not how you’re using it. You’re hoping someone will buy it from you if 30 years for more than you paid for it. You’re hoping that people not yet born will work to make the business valuable.
It’s not different than relying on the taxes of those not yet born.
Who knows how falling falling birth rates will pan out but if the shortage of workers changes the balance of capital vs labor those shares will be worth a lot less.
A "standard deduction" is pretty silly. Just raise the zero income floor. "Deductions" should be replaces with partial tax credits except for contributions to savings vehicles and SALT. These are needed to make the "income" tax more of a "consumption" tax.
Regarding (1) the idea is that because people invest their savings, which were presumably earned as labor income, taxing the capital gains would be a kind of “double-dipping” tax on people who made the prudent choice to invest rather than spend their cash on nice food or fancy cars or whatnot.
OK this is an argument for taxing consumption rather than income. I approve but it does require higher rates on the (income-savings) to raise the revenue we need. Indexing capital gains would be a good start.
I can see that, but how is it different from using post-income tax money to pay property and sales taxes? Not to mention paying income tax on Social Security payments.
How much pain are we actually talking about? There is a ton of wailing and gnashing of teeth about SS. It’s 25% underfunded so if we raised the employer and employee portion of the tax from its current 6.2% to 7.75% it’s fixed. That doesn’t seem like too high a bar.
1) That's a significant transfer from future retirees to current retirees, depending on how soon you retire. "You, young person will now pay more in taxes but not actually receive more in benefits. " Means-testing has always seemed to me to make more sense to cut expenditures. I mean, I _want_ a SS check when I retire, but I hope I'll be in a situation where I can do without.
2) If the population age-makeup continues to change, does this actually fix it in perpetuity?
I agree with Matt it would be prudent to trim government borrowing moving forward. But what’s the nickel version of the explanation as to why the US can’t simply rely on foreign savings? The pool of available savings isn’t domestic but global.
We can but we'll have higher real income if we finance investment with local savings. In addition using foreign savings overvalues the dollar and shifts income from producer of tradeable goods to producers of non-traded goods, a sort of anti-"industrial policy."
Even foreign investors will take their investments eleswhere if they don't get the (relatively high) interest rates they want. Larger debt service crowds out other government spending.
While that's undoubtedly true, it works the same way in reverse: if the US is generating adequate savings, those savings in theory should flow abroad if higher returns can be gotten outside the country. I guess what I'm wondering is: why doesn't a serious discussion regarding public debt, debt service, inflation, savings, tax policy and so on hinge mostly on domestic and not global concerns? As large as the US economy is, it still only accounts for about a fifth of the planet's output.
Two reasons probably are a lot of potential investments abroad are higher risk and capital controls in other countries make investment there more difficult.
Foreign investors undoubtedly want to invest in the US, but they don't want to lose money by not getting a return high enough to pay for their now-higher interest rates.
I do not know if Trump's policies were done because he was right and had good ideas, or if the ideas he's always held happened to fit the times. I am inclined to think the latter, but it could very well be the former. I have not found much from Trump lately, but this article from Fox News tells me that Trump would still be slamming Powell about interest rates if he were in office:
So I suspect this is a broken clock situation. The tax cuts also feels more like Trump and the GOP agreeing on something and knowing they can pass it. The expiration of the middle class tax cuts while the top rates are permanent was good politics by goading the Democrats into not extending them, but also forcing them to specifically pass legislation RAISING taxes on the rich.
But maybe there's something else there, who knows?
I wonder if mortgages are an unusually poor comparison for federal debt, despite being long term? Houses are sold by essentially a kind of silent auction, where your maximum bid is set by interest rates on mortgages in accordance with a fixed maximum percent of your monthly income. If rates rise, maximum bids have to fall for all non-cash buyers. So house prices go up when rates fall as the same pool of buyers try to outbid one another, and (with weaker/slower responses, because sellers may choose not to sell to lower bids) vice versa. If we were building lots of new units then we could keep prices low, or let people buy better houses, when rates are low. But I'm not sure that holds if we're all competing for a relatively limited pool of housing.
"Right now, nobody in GOP circles is talking about reversing their 30-year commitment to deficit-increasing tax cuts."
That is true, but obviously any sincere discussion of the medium-term deficit will have to be in large part about Medicare projections, right? Today's piece is in the realm of B+ Biden 2024 campaign material, but it doesn't really seem interested in any of the projected increases to spending that will make the 2017 TCJA look tiny by comparison. That's too bad, it'd be a good opportunity to discuss that.
No. It can and should be done with a combination of VAT and personal income taxes. Of course if you have a way of getting health care rationed by cost benefit analysis that would drop healthcare spending.
"The real fiscal policy tragedy during this era was that the deficit wasn’t big enough to create full employment."
No. That's wrong. The tragedy was that aggregate demand was too depressed to create full employment. But that is a MONETARY POLICY failure, not a fiscal policy failure.
You are much too quick to dismiss monetary policy. Fiscal deficits are not the cure for insufficient demand. Monetary stimulus is.
There are practical limits on monetary policy at the zero lower bound. The Fed used all its tools and then some between 2009-2015 but didn't get enough help from the fiscal side.
No. The fed just failed to use the tools it had. It offered IOR which blunted the effect of the self-limited amounts of QE it did. And if buying the entire portfolio of federal and Federally guaranteed debt was not enough to get inflation up to target it occur have bought foreign central bank and government liabilities, all with the message that "beatings/QE will continue until morale/inflation improves,: :)
No, there are not practical limits on monetary policy at the zero lower bounds. That claim is not correct. (You probably have a mistaken theory that monetary policy is about interest rates. And you worry that, with rates near zero, they can't be "cut" further. But that's not actually how monetary policy works. Monetary stimulus is about increasing the money supply. Changes in interest rates are an effect of increasing the money supply. But it actually doesn't matter much what happens to interest rates.)
And it is for sure factually false that "the Fed used all its tools". (Monetary policy doesn't need "help from the fiscal side".) You know the Fed did QE, right? What determined the volume of QE? Why didn't the Fed choose 2x that quantity? Or 10x? Or 100x?
Well said. While I suppose the Fed could hypothetically have gone into hitherto-uncharted negative interest rate territory, I'm not sure that America would necessarily have been better off with a dramatic incentive to keep cash under a mattress. Assuming you maintain the zero-interest rate lower bound, what more would we have asked from the Fed?
The root problem was that the Fed di not clearly convey it intention to "do what it takes" to get inflation back up to target, actually above target to adjust to a massive negative demand shock like the financial crisis.
A fair question ... but also extremely easy to answer.
Interest rates are not important. The Fed's primary concrete action is Open Market Operations, where the money supply is increased by purchasing financial assets (mostly Treasury bonds) on the open market, in exchange for newly created cash. The whole point of "Quantitative Easing" was to communicate that the money supply could continue to be increased, regardless of whether or not there was any effect on interest rates.
"What more could we have asked"? Easy! (1) The Fed should NOT have begun paying Interest on Excess Reserves to the banks, just after 2008 -- for the first time in a century! IOER locked up a huge fraction of the new money supply into unneeded excess reserves. The Fed made a critical monetary policy error by beginning IOER. (2) QE has no "zero lower bound" limit on the quantity of the money supply. Just keep increasing QE, until monetary stimulus provides the aggregate demand that you want.
This post adopts the progressive media framing that the Trump tax cuts were a big giveaway to the wealthy, with only a token cut for everyone else (if that's acknowledged at all).
https://smartasset.com/taxes/trump-tax-brackets
I have worked through numerous examples for different kinds of households and various levels of income, and I find that the tax savings for modest incomes are substantial. This is largely due to
* Doubling of the standard deduction (which swamps the elimination of the personal exemption)
* Reducing the marginal tax rates for all brackets except one
* Doubling of the child tax credit from $1k to $2k
One of the things that surprised me is that effective tax rates on income <$100k are objectively very low. Despite what you might hear from progressives, the federal tax code is super progressive. An across the board tax cut that still keeps the code quite progressive, why must this be characterized as unmitigated evil?
Moreover, as I was living in NYC at the time this legislation was passed, I personally saw a tax increase on my very high income, because of the new SALT deduction caps. Quite simple math would suggest that this outcome was experienced by quite a few high earners in high tax jurisdictions.
This idea that a significant benefit to a group should be written off because another group got a bigger benefit seems very suspect to me. When discussing student loan forgiveness, the progressive thought police were quick to point out that "I don't benefit" is not a reason to dismiss policy action, but apparently "I don't benefit as much" is?
Just a start on cutting spending:
Defense: Make our allies pay their fair share for global security. No more “cost plus” contracts.
Entitlements: Long term transition to private retirement savings, cash vouchers instead of Medicare, large estates repay Social Security and Medicare benefits.
Miscellaneous: End farm subsidies and corporate welfare. End funding for anything that is primarily state/local responsibility.
The problem is that interest rates are a very diffuse way to curb demand and, by extension, inflation, if that is your concern. Yes, borrowers are hit harder with higher rates, but even Ben Bernanke used to acknowledge the "fiscal channel" embedded in interest rates - i.e., higher rates generate more income and potential demand from savers. That might in part explain why the economy hasn't really slowed down all that much.
The big problem still seems to be the underlying economic distortions thrown up by Covid and the resultant shutdown that is still disrupting supply chains.
The esteem that trump had from good economic times cannot be overstated. The bulwark runs focus groups which reveal that many trump Biden voters would return to trump out of nostalgia for the pre trump economy.
I bet this is even more acute in rural America where the post crash recovery was slowest. “Trump fixed the economy” sounds ridiculous in Brooklyn. Rural America may remember the trump years as a rare bright spot in a long decline.
So Matthew is proposing that we pay off the debt while the economy is slowing down? I know the household accounting doesn't always line up, but I try to pay off debt when I am doing well, not the other way around.
Both parties these days are just trying to give free handouts. Democrats want a Scandinavian style safety net without their taxes, which is ridiculous. Republicans just want to cut taxes without touching spending. Both parties are so out of touch with basic math it is frustrating. I have to laugh a little when the subline is 'And a terrible time for a return to Trump's approach', when actually it is a terrible time to keep doing what the country has done for the last 23 years, both Democrats and Republicans.
Higher taxes have to occur, but the political will is just not there.
If you could really count of the Fed, any time would be a good time. Bernanke-Yellen really screwed up public understanding of macroeconomics by creating circumstances in which both inflation and employment were below target.
Slowing down? How so? They’ve been pretty amazing it will for two years now and I’m still waiting.
"Trump did a giant regressive tax cut, but still got to be a “populist” because domestic spending also went up."
It's worth noting that the domestic spending piece of this was highly contingent. Trump TRIED to do a massive welfare-state rollback (something the Biden campaign should remind voters in 2024). Thankfully he failed, and the Democratic House majority that resulted from this massively unpopular proposal helped increase domestic spending in 2019 and 2020. Trump ended up benefiting politically in 2020 from these circumstances but that's what happened.
The bottom line of this piece is correct- under present circumstances, Trump winning and doing another giant regressive tax cut would be bad. And it would ALSO be bad if he gets a big enough Senate majority to actually implement welfare state rollbacks, which a big GOP Senate majority will want to do!
We shouldn't overstate the macroeconomic case for Trump here. Unlike his predecessor, who inherited a massive crisis and turned it into a good economy with policies that were directionally correct, Trump inherited a good economy which turned into a really good economy. Some stuff he did surely helped at the margins, but in ways that were highly contingent - and the graph of job growth basically just continued its Obama-era trend through Trump's term until the COVID recession.
Neither Trump nor Obama had a significant impact on macroeconomics. That's the Fed's role.
I think a good point. There is an exaggeration of the effect of policy and governance on the economy. To the extent that it does effect things it is often years later.
The ups and downs of the business cycles are not tied to the politics du jour.though it has some effect, and often the numbers that a president gets whether gdp, income, stock market, are often just whether you inherit the reins of government when it is down or up with regression to the mean a bigger factor than ones genius or ineptness.
Was Bush responsible for the recession? Did he invent credit default swaps and was responsible for the housing bubble? Was Obama and Trumps growing econmomy anything more than returning from the recession? Was Tump's very strong economy based on debt spending and living off the credit card, likewise Biden,
It's a great point that public opinion on the state of the economy generally overrates the role of the current President and massively underrates the role of the Fed. Monetary policy matters a LOT.
However, to make a sports analogy, Obama had what I think is pretty clearly a high "wins above replacement" value for the American economy. During his term, both his domestic opponents and quite a few of his international contemporaries were pushing for fiscal austerity. The fact that he managed to pass some fiscal stimulus was important. And as Matt recently wrote about, America doing some fiscal stimulus during the Obama years while there was austerity mania in the EU is a big reason why our economy is now trouncing theirs even though they were similar in size in 2008. If you want to know what our economy would have looked like had we chosen austerity instead of stimulus in 2009, look at a graph of unemployment in the EU - it didn't start going back down until 2013! Ugly stuff - the true villian of the Great Recession was Wolfgang Schäuble.
My main point was that Trump's "wins above replacement" value was a lot smaller than this. He inherited a good economy that turned really good but largely by continuing on the same trajectory, and some of the beneficial things he did were basically accidental / contingent.
Raising revenue is easy theoretically, if all the deductions in the tax code were eliminated, it would raise hundreds of millions to billions of dollars. The problem is all sorts of special-interest groups would be up in arms about this.
Healthcare costs will never get under control, when we have 60-65% of the population being overweight or obese, 10-15% of the population who smoke tobacco, and another percentage of people who have problems with alcohol or drugs, leading to conditions like hepatitis, HIV, emphysema, heart failure. All of the chronic diseases that kill people in developed countries, are directly caused by lifestyle factors. Japan's life expectancy is something like 84, meanwhile the US is hovering around 75-76.
“ 60-65% of the population being overweight or obese”
When does ozempic go off patent?
Checking….
Fairly soon if I’m reading this correctly:
https://www.fiercepharma.com/pharma/novo-nordisk-teva-ink-victoza-settlement-for-december-2023-generic-launch
I still don't believe those drugs are a cure-all, and because the drugs are so new, I wonder whether people keep the weight off or eventually gain the weight back, what the long term side effects are or could be, or whether the medications lose effectiveness over time.
You talk a lot about taxes, but yhe real key to deficit reduction will always be spending restraint.
Moreover, the real danger continues to be entitlements.
You don't fix those nothing else matters
No, deficit is taxes minus spending. Neither are more important than the other. Simple math. Both adding to taxes or reducing spending has the same effect. You can spend a lot as many countries do yet have little debt.
There's an upper limit to taxes, but there is no limit to spending.
The limit to both spending and taxes is what may pass Congress which is political. Neither high taxes or cuts in spending are very popular and so that is where it stands. As already stated spending as a percentage of gdp has not changed greatly from 1950 until Covid, and I wouldn't take the last four years as normal, and I think we definitely overdid the Covid stimulus (eg paying people 150% of income when staying home).
Real after tax income has also consistently grown over the years, so this grievance that we are taxing ourselves to death is belied by the fact that we are doing economically better while at the same time caring for our increasing percentage of retirees and expanding healthcare for poorer Americans. In fact the gains in income of the upper quintile exceed greatly all the national gains, which is why I strongly would alter marginal tax rates so that our natural increases in wealth and income that come naturally with higher productivity
What about entitlements? Increase the SS potion of FICA from 6.2% and 7.75% and it’s fixed in perpetuity.
Or finance them and UI with a VAT
The original payroll tax was one percent. It takes ever more “contributions” to meet obligations to those at the top of the pyramid. I’ve gotten snapped at in this forum for calling SS a Ponzi scheme. But yes, it’s a Ponzi scheme.
Not a Ponzi which implies pay ins that cant cover pay outs. In a stable system SS could work fine and did for many years, the main problem now is that people live longer and have less children so the employed worker/retiree ratio has increased enormously. Not hard to fix but obviously would require higher payroll taxes or reduced spending and likely both. I favor increasing the cap on SS taxes while also increasing the eligibility age to reflect that people live and work longer.
The VAT had not been invented in FDR's day so he and Truman get a pass. But by Eisenhower's second term it could have replaced the wage tax. The big missed opportunities were when Medicare was created under LBJ and when SS was reformed under Reagan.
Yeh, no. It’s no more a Ponzi scheme that whatever bonds or stock are in your 401k. They all represent the willingness of future workers to pay for your retirement.
The stocks in your 401K represent (at least in theory) something tangible - business that are producing products and services and earning income. Social Security is zero value added, just transferring money from new participants to old participants.
But that’s not how you’re using it. You’re hoping someone will buy it from you if 30 years for more than you paid for it. You’re hoping that people not yet born will work to make the business valuable.
It’s not different than relying on the taxes of those not yet born.
Who knows how falling falling birth rates will pan out but if the shortage of workers changes the balance of capital vs labor those shares will be worth a lot less.
Maybe he holds high-dividend stocks.
That doesn't fix Medicare
And that's a pretty big tax increase
Are there good policy reasons against 1) treating all income the same 2) increasing the standard deduction 3) getting rid of all other deductions?
A "standard deduction" is pretty silly. Just raise the zero income floor. "Deductions" should be replaces with partial tax credits except for contributions to savings vehicles and SALT. These are needed to make the "income" tax more of a "consumption" tax.
Regarding (1) the idea is that because people invest their savings, which were presumably earned as labor income, taxing the capital gains would be a kind of “double-dipping” tax on people who made the prudent choice to invest rather than spend their cash on nice food or fancy cars or whatnot.
OK this is an argument for taxing consumption rather than income. I approve but it does require higher rates on the (income-savings) to raise the revenue we need. Indexing capital gains would be a good start.
I can see that, but how is it different from using post-income tax money to pay property and sales taxes? Not to mention paying income tax on Social Security payments.
I think the idea is that you specifically don't want to discourage investment.
THAT is the reason to eliminate the deficit in the first place, shift resources from consumption to investment.
One good idea would be to eliminate the corporate tax and just tax all personal income the same.
Yes. Tax the owners of capital, not the managers of capital.
How much pain are we actually talking about? There is a ton of wailing and gnashing of teeth about SS. It’s 25% underfunded so if we raised the employer and employee portion of the tax from its current 6.2% to 7.75% it’s fixed. That doesn’t seem like too high a bar.
1) That's a significant transfer from future retirees to current retirees, depending on how soon you retire. "You, young person will now pay more in taxes but not actually receive more in benefits. " Means-testing has always seemed to me to make more sense to cut expenditures. I mean, I _want_ a SS check when I retire, but I hope I'll be in a situation where I can do without.
2) If the population age-makeup continues to change, does this actually fix it in perpetuity?
Instead of means testing SS, just tax it as we do. Scrooge McDuck's SS check is taxed at 50%, Donald's at zero.
I agree with Matt it would be prudent to trim government borrowing moving forward. But what’s the nickel version of the explanation as to why the US can’t simply rely on foreign savings? The pool of available savings isn’t domestic but global.
We can but we'll have higher real income if we finance investment with local savings. In addition using foreign savings overvalues the dollar and shifts income from producer of tradeable goods to producers of non-traded goods, a sort of anti-"industrial policy."
Even foreign investors will take their investments eleswhere if they don't get the (relatively high) interest rates they want. Larger debt service crowds out other government spending.
While that's undoubtedly true, it works the same way in reverse: if the US is generating adequate savings, those savings in theory should flow abroad if higher returns can be gotten outside the country. I guess what I'm wondering is: why doesn't a serious discussion regarding public debt, debt service, inflation, savings, tax policy and so on hinge mostly on domestic and not global concerns? As large as the US economy is, it still only accounts for about a fifth of the planet's output.
Two reasons probably are a lot of potential investments abroad are higher risk and capital controls in other countries make investment there more difficult.
Foreign investors undoubtedly want to invest in the US, but they don't want to lose money by not getting a return high enough to pay for their now-higher interest rates.
I do not know if Trump's policies were done because he was right and had good ideas, or if the ideas he's always held happened to fit the times. I am inclined to think the latter, but it could very well be the former. I have not found much from Trump lately, but this article from Fox News tells me that Trump would still be slamming Powell about interest rates if he were in office:
https://www.foxnews.com/media/trump-offers-unique-solution-bank-crises-slam-interest-rate-happy-fed-chair
So I suspect this is a broken clock situation. The tax cuts also feels more like Trump and the GOP agreeing on something and knowing they can pass it. The expiration of the middle class tax cuts while the top rates are permanent was good politics by goading the Democrats into not extending them, but also forcing them to specifically pass legislation RAISING taxes on the rich.
But maybe there's something else there, who knows?
Don't forget the SALT cap. I hate Trump, but that was an ingenious move, politically.
What the US really needs is a VAT.
I wonder if mortgages are an unusually poor comparison for federal debt, despite being long term? Houses are sold by essentially a kind of silent auction, where your maximum bid is set by interest rates on mortgages in accordance with a fixed maximum percent of your monthly income. If rates rise, maximum bids have to fall for all non-cash buyers. So house prices go up when rates fall as the same pool of buyers try to outbid one another, and (with weaker/slower responses, because sellers may choose not to sell to lower bids) vice versa. If we were building lots of new units then we could keep prices low, or let people buy better houses, when rates are low. But I'm not sure that holds if we're all competing for a relatively limited pool of housing.
"Right now, nobody in GOP circles is talking about reversing their 30-year commitment to deficit-increasing tax cuts."
That is true, but obviously any sincere discussion of the medium-term deficit will have to be in large part about Medicare projections, right? Today's piece is in the realm of B+ Biden 2024 campaign material, but it doesn't really seem interested in any of the projected increases to spending that will make the 2017 TCJA look tiny by comparison. That's too bad, it'd be a good opportunity to discuss that.
No. It can and should be done with a combination of VAT and personal income taxes. Of course if you have a way of getting health care rationed by cost benefit analysis that would drop healthcare spending.
"The real fiscal policy tragedy during this era was that the deficit wasn’t big enough to create full employment."
No. That's wrong. The tragedy was that aggregate demand was too depressed to create full employment. But that is a MONETARY POLICY failure, not a fiscal policy failure.
You are much too quick to dismiss monetary policy. Fiscal deficits are not the cure for insufficient demand. Monetary stimulus is.
There are practical limits on monetary policy at the zero lower bound. The Fed used all its tools and then some between 2009-2015 but didn't get enough help from the fiscal side.
No. The fed just failed to use the tools it had. It offered IOR which blunted the effect of the self-limited amounts of QE it did. And if buying the entire portfolio of federal and Federally guaranteed debt was not enough to get inflation up to target it occur have bought foreign central bank and government liabilities, all with the message that "beatings/QE will continue until morale/inflation improves,: :)
No, there are not practical limits on monetary policy at the zero lower bounds. That claim is not correct. (You probably have a mistaken theory that monetary policy is about interest rates. And you worry that, with rates near zero, they can't be "cut" further. But that's not actually how monetary policy works. Monetary stimulus is about increasing the money supply. Changes in interest rates are an effect of increasing the money supply. But it actually doesn't matter much what happens to interest rates.)
And it is for sure factually false that "the Fed used all its tools". (Monetary policy doesn't need "help from the fiscal side".) You know the Fed did QE, right? What determined the volume of QE? Why didn't the Fed choose 2x that quantity? Or 10x? Or 100x?
Well said. While I suppose the Fed could hypothetically have gone into hitherto-uncharted negative interest rate territory, I'm not sure that America would necessarily have been better off with a dramatic incentive to keep cash under a mattress. Assuming you maintain the zero-interest rate lower bound, what more would we have asked from the Fed?
The root problem was that the Fed di not clearly convey it intention to "do what it takes" to get inflation back up to target, actually above target to adjust to a massive negative demand shock like the financial crisis.
A fair question ... but also extremely easy to answer.
Interest rates are not important. The Fed's primary concrete action is Open Market Operations, where the money supply is increased by purchasing financial assets (mostly Treasury bonds) on the open market, in exchange for newly created cash. The whole point of "Quantitative Easing" was to communicate that the money supply could continue to be increased, regardless of whether or not there was any effect on interest rates.
"What more could we have asked"? Easy! (1) The Fed should NOT have begun paying Interest on Excess Reserves to the banks, just after 2008 -- for the first time in a century! IOER locked up a huge fraction of the new money supply into unneeded excess reserves. The Fed made a critical monetary policy error by beginning IOER. (2) QE has no "zero lower bound" limit on the quantity of the money supply. Just keep increasing QE, until monetary stimulus provides the aggregate demand that you want.
You guys are being WAY too forgiving of the Fed's bad monetary policy. The Fed CAUSED the 2008 recession. And they've escaped proper blame for their mistakes! "The Real Problem was Nominal": https://www.cato-unbound.org/2009/09/14/scott-sumner/real-problem-was-nominal/
I'm not sure whether you are right or not. I'm not a monetary policy wonk. Thanks for the posts though, great stuff.