IMF does not agree with "Trumpenomics"
The tax framework backed by Trump, calls for sharply cutting corporate tax rates and taxes on higher income earners. The logic follows that slashing the rate would help incentivize more companies to operate/invest in the US, which boosts productivity and creates more jobs with higher wages. This argument surfaced amidst a worldwide phenomenon where free trade and open borders saw companies moving out of the US to countries with lower costs of operation, resulting in unequal distribution of wealth.
However in this article, https://www.bloomberg.com/amp/news/articles/2017-…
There’s no strong empirical evidence that moderately progressive tax systems harm economic growth. (IMF, 2017)
In my opinion, reducing such taxes are just symptomatic prescriptions that do not address the problem of jobs leaving the US at its core. The main issue is that the US has lost its comparative advantage in the global arena. They need to invest more in developing their most important resource – its people.
Do you all agree with the direction of the proposed tax plan?
Some general thoughts
A.) This experiment has already been tried via the monetary policy lever. Federal Funds rate were below 1% from 2009-2016 in an attempt to stimulate the economy by making the cost of cash in the U.S. virtually naught. At the retail level, individuals were already too encumbered and overwhelmed with their existing levels of debt to countenance additional debt, even if the cost was virtually nothing. The beneficiaries were largely corporations, whom rolled over large amounts of debt or added to existing debt in order to finance share buybacks/dividends. When you make cash available in a tepid growth environment, sub 3% growth, it’s not going to be allocated towards CAPEX or employment, it will fund different forms of financial engineering, as it immediately rewards shareholders and executives. This is why in 2015/2016 you saw in aggregate more being paid out in dividends/buybacks by companies than the entirety of their operating earnings.
B.) International monetary order is more rigid now in the developed world. This is a good thing for stability but has countervailing consequences. Prior to the Bretton Woods agreement, when consenting nations agreed to maintain a fixed exchange rate, countries could devalue their currencies in order to gain a comparative advantage in trade. China, you could argue, still manages to do this to a certain extent today. This sort of deliberate devaluation, however, is now policed on an international stage and carries its own domestic, political consequences. Instead, to gain comparative advantage countries are forced to devalue their labor base. Your seeing this happen in France right now to appease the deficit-averse German dominated Eurogroup. Since the U.S. can tolerate massive export deficits instead of a devaluing of the labor base we’ve seen an exodus of industry and a swelling of our import/export deficit.
C.) I don’t think the U.S. can improve much upon its import/export deficit without destabilizing international monetary policy. The Maastricht treaty that underpins the EU mandates that EU nations generate a government surplus of 3%. This is nearly impossible to do without a net import/export surplus. Assuming all nations that have ratified this treaty are targeting a surplus, in addition to countries like China, Russia, and Japan which also run major surpluses, then somebody has to be willing to run a major net deficit. America for good or bad, agreed to play this role a long time ago under Paul Volcker’s architecture. This is a long way of saying that there is a certain international monetary order in place that cannot be reduced to simple comparative advantages between countries.
D.) It’s hard to believe that trickle-down economics is still being pushed as catalyst for growth. Look no further than the recent experiment in Kansas to see that the reality of it does not cohere with the theory. I’ll leave it at that.
Wow, thanks for sharing your insights! A lot of this is really new to me, I hope I understand it correctly as I share some thoughts as well
C.) This is not sustainable, it almost sounds like a bubble. As a big believer of Solow's Exogenous Growth Model, the only real way to create growth is through gains in productivity. Paradoxically, US perhaps could 'export money' to Emerging markets where there is a ton of inefficiencies they can create value in.
D.) it's almost like Japan's 'Abenomics' where he's just trying to do the opposite in hopes that it reaps opposite results.
This is a major concern. It’s an over simplification but a good way to think about how money moves around the world is the following: Nations with a large trade balance are exporting goods and in return importing cash. The liquidity provided by the inflow of cash then reduces the cost of cash (interest rates) in the trade surplus countries. Deficit nations, in normal times without some form of monetary intervention, tend to provide higher interest rates which attracts the cash back from the surplus nations. The system functions well because it’s able to recycle the surpluses on its own.
Again, it’s a simplification, but when nations lack a central bank (Fed) that can independently print money they must rely on their trade balance to modulate their money supply—this is one of the major differences between the U.S. and a country in the E.U. In this sort of vacuum, if a country is running a major surplus, it’s also essentially exporting deflation to the other nations. Less money is available in the trade deficit economies, which cuts demand, which cuts employment, which lowers prices, which lowers tax revenue, and so on. This is why many nations, with the U.S. being a clear exception, are very cognizant of their trade balances. However, the system is only sustainable as long as surplus nations are willing to invest their money in nations running a deficit, effectively relieving the money shortage, or, if the U.S is willing to run massive deficits and essentially export cash to the rest of the world. The U.S. can’t continue to do so without losing its credibility to service its debt, and the German led EU currently lacks the political will and means to efficiently recycle their surpluses.
This is why you see a lot of EU countries “devaluing” their labor force and removing protections over the last five years. They don’t want to A.) violate the mandate of the Maastricht treaty and B.) want to avoid getting caught in a deflationary tail-spin.
The question is WHY growth is at sub 3% despite cash being virtually free? and corp can pursue whatever stupid investment/M&A projects they can think of.
Hold on there. The Maastricht treaty says that the government DEFICIT should not exceed 3%, not that governments must run a 3% surplus [url]https://en.wikipedia.org/wiki/Maastricht_Treaty#The_Maastricht_criteria…] Hence your comment that EU nations are forced to run trade surpluses to achieve that is plain wrong. Many EU countries were running trade deficits during the Euro crisis but have since made improvements on balancing their books. This was mostly done by reducing their imports though, not by expanding their exports! Hence, they were basically living above their means in the past and have now adjusted to reality. Notwithstanding, should the US follow that approach and curb back on their imports, this will have disproportionately higher impact on the world economy than Greece, Portugal or even Spain doing that.
I agree on a lot of your other points though. Also, it is ridiculous that US conglomerates are forced to hoard billions of dollars abroad which can't be brought back to the US for investments
SB for the correction
I don't agree at all with what you're saying here. Monetary and tax policy are fundamentally different mechanisms. In addition, coming from the lending side, I can tell you how incredibly difficult access to capital has been for small- and medium-sized businesses due to the intense regulatory scrutiny, brought to you by Dodd-Frank. One would not expect monetary stimulus to be effective in capital formation if lenders are not allowed to lend to anyone other than the most creditworthy borrowers.
To be honest, I think this is a fair criticism. In response, I'll offer one concession and one contention.
I agree that overly stringent, post-crisis lending criteria certainly restricted access to cheap capital, especially at the small to mid-size business level. I won't dispute that or the implication that some potential growth could have been stifled as a result. Valid points.
I don't think, however, that this negates the comparison in it's entirety. Ultimately, capital is fungible. Whether it's availability is due to lax monetary policy or lowered corporate tax rates, the source does not factor into how it's deployed once attained. The empirical evidence shows that companies who did have access to capital did not invest it in a growth oriented capacity. With growth prospects largely unchanged since 2011, this data point is indicative of how additional capital would be allocated today by those same businesses.
Small to mid-size businesses is more of an unknown. Lending through formal channels has become stricter, but at the same time the proliferation of alternative sources of funding can't be ignored either (VC, Angel, Crowd-funding, ect). It's never been easier for high-growth, small businesses to receive outside rounds of funding. I'm not disagreeing here, I'm just not entirely convinced that access to capital is the real constraint when growth rates are hovering around 2-2.5% and the fed funds rate is 1.25%.
D.) It's hard to believe that trickle-down economics is still being pushed as catalyst for growth. Look no further than the recent experiment in Kansas to see that the reality of it does not cohere with the theory. I'll leave it at that.
I literally could have told you that you would say this before even reading your response, why speak in platitudes like this? It is like you are actually giving programmed responses because you can't think of your own.... Just like when I asked you a 1st grade tier question you couldn't answer.
Esuric is right you people just use platitudes and talking points to control your entire brain
Christ, its you again. Back for your monthly mental bludgeoning I presume. From your misuse of the word platitude, its clear you've had no appreciable increase in intelligence since your last series of intellectually empty, childish posts that were ridiculed.
Platitude implies some element of moral content. Clearly there is none in my argument, but that sort of nuance requires more than being a fanboy who parrots lines from their favorite posters completely out of context.
I hope you are not too dense to see the irony behind accusing me of lacking my own ability to think, and then proceeding to regurgitate somebody else's refrain over and over again. If you are though, perhaps Esuric can explain it to you.
You could have explained why Kansas is, perhaps, not representative of trickle-down economics. Or, why failure there is not a blight against it. Or, advanced an argument for why it is in fact stimulative for an economy. Instead, once again, you've cluttered another thread with playground level arguments. Go rail against Colin Kaepernick in the Barstool comment section and let adults discuss the economy.
who dares summon me?
I’ll keep going as I think it’s an interesting topic and I’m disappointed that it has yet to gain any traction on a Finance Forum.
E.) Unless a budget resolution passes the Senate, which Trump, with his recent alienation of Bob Corker, seems hell-bent on preventing, then Tax reform is dead in the water, full-stop. The only recourse for passing Tax Reform that is asymmetrically steered towards top-earners and corporations in today’s divided Senate is via reconciliation. In order to even make reconciliation available for Tax reform, the budget resolution must provision for it and provide explicit parameters. Certain deficit-hawks are already queasy over this prospect and Trump continues to provoke rather than persuade key figures. This should be the easy part in a GOP controlled Congress. The fact that it's not is telling of the turbulence yet to come when the actual legislating begins and the lobbyists and donors begin to show up en mass demanding some form of recompense for their contributions.
The government is a far worse steward of capital than any private interest. That's really the only argument that needs to be made. Of course the IMF isn't a fan of tax cuts. What's next, an article by a policeman on speeding?
Corporate taxes are just a small amount of total government receipts. The amount being paid has actually been declining. The larger problem is that the tax code is not comprehensive enough to ensure the government is actually capturing the taxes it should earn on corporate earning. In fact, personal income taxes are the more important topic. Trump's tax plan leaves a moderate progressive system with flexibility to leave a higher top income rate.
There's nothing wrong with a progressive system. But tax policy that is simpler, allows foreign income to come back into the country, and one that benefits the middle class is important. Hopefully, all of this will make the US more competitive by raising revenue while also encouraging a higher savings rate for households and more consumption.
Uhh, "Trumpenomics" maintains a progressive tax system; in fact, it may even exacerbate the progressiveness by eliminating certain write-offs that disproportionately help higher income earners and by doubling the standard deduction. Corporate income tax rates are an entirely separate topic from the progressive income tax. We can't even start to discuss tax reform if we aren't even discussing the same topic.
On the topic of corporate income tax reductions, there have been many studies over the years that show a reduction in corporate tax rates could actually benefit middle class wage earners.
Funny how the IMF doesn't agree with this, yet the cut to business taxes would put them on par with other developed nations. It almost sounds like the EU countries are worried that this move will send them into recession.
With regard to corporate income tax reform, the Wall Street Journal discusses America's issue with growth:
https://www.wsj.com/articles/tax-reform-will-give-workers-a-raise-15076…
The tax-reform package...aims to address the reasons that the current economic recovery has been the most anemic on record. If it becomes law, we can expect economic growth to accelerate to roughly 3.2% for the next three to five years, then settle in at a sustainable pace of around 2.5%. This is well above current official expectations for long-term growth of about 1.9%.
Both history and economics suggest that most of this additional growth will accrue to workers in higher real wages. From 1965 through 2010, the economy grew at an average annual rate of 3.1%. It attained that pace by combining 1.5% employment growth with 3.2% growth in the capital stock and a 1.1% annual rise in total factor productivity. By contrast, the 2.1% average annual growth rate observed from 2011-16 combined the same rapid employment growth with a feeble 1.7% expansion of the capital stock and total factor productivity of just 0.5%. Real wages stagnated.
Any growth-oriented policy must therefore address the problem that, in the current recovery, capital-formation growth was nearly cut in half and productivity growth by more than half.
In other words, U.S. GDP has growth has stagnated due to poor capital investment, and any tax reform package should focus on incentivizing capital investment.
100% deductible depreciation of capital investment definitely addresses this point. However, one could argue it would accelerate overall rate of automation which in turn increases productivity for some workers but eliminates a number of jobs in the process. Wages for certain positions would go up, but others will be eliminated. You could argue that net effect could be positive overall for a few years but then long run maybe not so much.
A lot will depend on if there are actual structural reforms to the tax code (unlikely) or short term tax cuts (10 years or less). I would think short term tax cuts in general will not drive significant wage growth over the long term.
I actually don't agree with any tax reform that doesn't match generally accepted accounting principles. I hate the concept of accelerated depreciation ("expensing") of capital investment because it's the government, once again, picking winners and losers (or, in this case, industry winners and losers as some industries are more capital intensive than others).
I think business tax reform should focus on rates and ridding the system of various benefits for certain industries (returning to GAAP), followed by regulatory reform (which we are seeing some of already with this administration through executive action, but it's not enough).
"If it becomes law, we can expect economic growth to accelerate to roughly 3.2% for the next three to five years, then settle in at a sustainable pace of around 2.5%." No basis for this argument had been established. Basing this assumption on historical growth rates seems like it would be a false equivalency.
In the modern period, we're much more dependent on an international world, which means that companies won't invest here if rates of return are higher in other parts of the world. I think the most dependable source to expect more economic activity is in the household sector. Exports could probably increase before investment spending on the basis of more at home productivity and a weaker dollar after. The only realistic case that companies will invest here is if the cost of capital falls, which is not likely in the immediate future.
In other words, you're a proponent of Larry Summers' "secular stagnation", which I utterly reject as a scapegoat to deflect from terrible government policies. Reduce the capital gains tax rate, reduce corporate income tax rate, loosen the regulatory stranglehold and you'll see accelerated growth. With all of the terrible government policies in place, I reject the notion that growth is what it is.
To further my point below:
http://www.heritage.org/index/country/unitedstates#regulatory-efficiency
The number of federal regulations has increased substantially, raising total annual compliance costs to more than $100 billion in just seven years.
Forget tax rates, we increased "taxes" by $100 billion/year over the last 7 years due to regulation. Government policies are strangling economic growth, putting U.S. economic freedom behind economic competitors Canada and the UK. How can we buy into the idea that we just need to accept lower growth?
Schreckstoff
I am sort of curious, I will be studying further into economics and politics later on, very interesting thread here.
Being a small business owner, we largely depend on local customers in terms of revenue growth, as we are a service-based business. We are not necessarily conflicted by international markets since this does not apply to us, unless we created a product line (say clothing/fashionable wear) that can be distributed online.
So, let me get this straight. If other nations are receiving a stronger competitive advantage because they -devalued- their currency, is it a safe bet that we must do the same in order to receive that competitive advantage and spur job growth?
I am interested in becoming more familiar with the topic, what books would you recommend?
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