My Two Cents On The Tax Debate

While, like most folks who pay taxes, I’m never one to turn down a tax cut, I often find myself explaining to clients how a recession in the near-term would be unusually tough to combat using conventional fiscal and monetary means. 

On the fiscal side, we recently cut taxes at a time when, frankly, the economy didn’t need it. I know, how dare I! Well, you’ll understand how dare I if we enter the next recession while borrowing at a record-breaking pace (yep folks, we’re there!). I mean, where’s the fiscal stimulus (tax cuts and increased spending) going to come from?

On the monetary side, while I agree that the Fed must pause here, if they don’t get aggressive the next time the getting’s good (as the economy begins to re-accelerate), we’ll be entering the next recession with very little interest rate firepower to work with. There’s also the balance sheet issue, which, well, I’ll just say there’s also the balance sheet issue. But, again, and alas, the getting’s not presently good…

So, since we really can’t justifiably look to the Fed to raise interest rates right here, let’s at least raise taxes! Agreed? No? Good!

Here’s The Economist making sense this week:  emphasis mine…

What about income tax? Ms Ocasio-Cortez’s boosters point out that a 70% levy is close to the rate that is said to maximise revenue in one notable economic study. In truth the study is notable because it is an outlier—one that ignores the benefits of entrepreneurial innovation or of workers improving their skills. France’s short-lived 75% top tax rate, which was scrapped at the end of 2014, raised less money than was hoped.

Although there is scope to raise taxes on the rich, they cannot pay for everything, if only because the rich are relatively scarce. One estimate puts extra annual revenue from Ms Ocasio-Cortez’s idea, which applies only to incomes above $10m, at perhaps $12bn, or 0.3% of the tax take. Ms Warren’s proposal would raise $210bn a year, her backers say—but they assume, implausibly, limited avoidance and no economic damage. 

Trust me my friends, raising taxes in the manner a number of political hopefuls presently prescribe would do more harm than good.

In my humble view, the best we can do now is dispense with any and all existing nonsense that stands to do real damage to the real economy (the tax revenue generating monster that it is/can be).

Let’s start by ending the trade war with China (at a minimum, cancelling all tariffs created by the present administration), then follow up by rekindling our somewhat damaged relationships with our largest trading partners, then reclaim our leadership on the global trade front. I’d love to see Washington somehow find its way back into the Transpacific Partnership (TPP) in 2019. That could be huge for the U.S. economy, and not to mention its financial markets!

P.S. If you’re in the camp that thinks the tax law should be leveraged to balance the wealth of the masses; if “equality” is what you long for, well, all I can say is be very careful what you long for! For, as Milton Friedman liked to say:

“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”


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