U.S. Tax Reform: Where Are We Now?


– Good evening. My name is Janet Gornick. I’m professor of political
science and sociology here at the Graduate Center and Director of Stone Center
on Socio-Economic inequality, and I have the pleasure
of welcoming all of you to the Graduate Center of the
City University of New York and to tonight’s event. And to those of you who are watching via livestream, thank you for joining us. For those of you who
are new to our community let me take a moment or two to tell you about the Graduate Center, the Doctoral Granting Campus of the City of University of New York. As our name implies, the Graduate Center is a national leader in graduate education at
the masters and especially at the doctoral level. We are one of the largest
PhD granting institutions in the country. And we are especially proud
to rank among the country’s top 10 institutions in
awarding doctorates to students from underrepresented groups. The Graduate Center is not
just dedicated to advanced education and research, we’re also a major contributor
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teach more then 200,000 of our own undergraduates, bringing the resources
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into every neighborhood in this city. We’re also a place for
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and on the livestream, to follow our public programming schedule throughout the year. The Graduate Center is also
home to over 30 research centers and institutes including the one I direct, The Stone Center. The Stone Center, there we
are a interdisciplinary group of 6 professors, a small staff, and a growing group of students. Our work is focused on research
and education and teaching about the causes and the
nature and the consequences of several forums of
socio-economic inequality. And we are very delighted
to be the cosponsors of tonight’s panel: Inequality. And that brings me to tonight’s topic, the recent tax reform. Many of its critics argue
that it will have severely disequalizing consequences. And its supporters argue otherwise. I’m confident that
tonight’s esteem panelists will help us to sort out fact from fiction on that question regarding the
laws distributional effects as well as other potential effects. For example on the demand for labor, on capital formation, on the federal budget
deficit, and much more. Our moderator this
evening is Kathleen Hays. As i think you all know, you’ve been given index cards
and will have the opportunity to write questions on those cards and the staff of the GC will gather them at about seven past ten and we will hand them to Kathleen, so the last few questions
will come from the group. Kathleen Hays is recognized as one of the top economics reporters and anchors in the country. She’s covered the U.S. economy
and the Federal Reserve for more than 20 years. She joined Bloomberg in 2006, after years as an on air and
online economics corespondent for CNN and for CNBC, where she served as host, corespondent, and commentator for several programs. Kathleen attended Stanford University, where she earned both a Bachelors degree and a Masters degree in economics. Kathleen, welcome back
to the Graduate Center. She’s been on our stage many times, so thank you. (audience applause) Kathleen will lead a discussion
among our four panelists. As I’m sure you could imagine, I could spend a half an hour
introducing each of them, but lucky you, I will not. I’m gonna be very very brief and hope that I haven’t reeked havoc on any of their biographies. Suffice it to say that they’ve all written many papers and books, both within and outside of academia. Going in order across the stage, Larry Kotlikoff is a William
Fairfield Warren Professor at Boston University and
professor of economics at Boston University. (audience applause) He’s also president of
Economic Security Planning, a company specializing in
financial planning software. Through his company Professor Kotlikoff has designed the nation’s
top ranked personal finance planning software. And in 2014 he was named by The Economist as one of the worlds 25
most influential economists. He received his Bachelors
degree in economics from the University of Pennsylvanian and a PhD in economics
from Harvard University. Next Lily Batchelder, is the Frederick and Grace
Stokes Professor of Law at NYU School of Law, and an Affiliated Professor
at the NYU’s Wagner School. She’s also former Deputy
Director of President Obama’s National Economic Counsel. Lily’s research in teaching focuses on personal income
taxes, business tax reform, wealth transfer taxes,
retirement savings policy, and social insurance. She received an AB in political
science from Stanford, and MPP from the Kennedy
School at Harvard, and JD from Yale Law School. (audience applause) Len Berman is Institute
Fellow at the Urban Institute, the Paul Volcker Professor, and Professor of Public Administration and International Affairs
at the Maxwell School, and a Senior Research Associate at the Syracuse University
Center for Policy Research, excuse me. He co-founded, importantly, the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, and he’s also past president of the National Tax Association. Len holds a PhD from the
University of Minnesota and a Bachelors from Wesleyan University. (audience applause) and last but not least, I’m happy to introduce my
colleague, Paul Krugman. Paul is a distinguished
professor of economics here at the Graduate Center, a core faculty member at The Stone Center, a list Senior Scholar, and as you all surely
know an op-ed columnist for the New York Times. (audience laughter) He previously taught at MIT,
Stanford, and Princeton. He received his undergraduate
degree from Yale, and his PhD from MIT. Paul has received many honors, including the John Bates Clark Medal and the Nobel Memorial Prize
in economic sciences in 2008. In The Stone Center, we are impressed by his Nobel prize but… (audience laughter) We’re really much more
excited about the fact that he has 4.33 million
Twitter followers. (audience laughter) (audience applause) Kathleen I turn the evening over to you. – Okay. I think everybody can hear me, I think. – [Audience] Is your microphone on? – Okay, maybe we have to hold these. Alright I wasn’t sure. Okay, now you can hear me. So welcome. I’m so happy to be here. I know certainly everyone’s agreed, you hear all the time
about the U.S. tax system and it’s got this wrong with it and it’s got that wrong with it, and of course maybe that’s
at least the good news, that we got the ball rolling in Washington and of course where’s it gonna roll and who’s it gonna roll over, is a very big question. And we’ve got a really great panel to look at some many
different aspects of this. And I think they are aware that you guys are a smart
sophisticated audience but… When you’re writing up your
questions I just want to say, if there’s something, don’t ever think a question is
too simple of obvious to ask, sometimes those are the best questions that get the best answers. I have to interview people a lot and I’ve learned that the hard way. I’d also like to say, I think I’m gonna start with Paul. We’re gonna give everybody a chance just to make a broad statement
on the tax reform bill, you know, what it means
for the economy broadly and whatever aspect
they choose to address. It’s Paul’s birthday today. It’s also… (audience applause) It’s also Janet Gornick’s birthday. They share the same
birthday among other things. (audience applause) He’s so happy about Medicare, it’s perfect. I think that’s why he’s not
celebrating his birthday ’cause that was the perfect hook to tax reform in
budget and everything else. So Paul since you’re the
birthday boy on the panel, you can kick it off. – Okay. Boy, yeah. Nothing says birthday celebration like a discussion on tax policy. (audience laughing) Okay, so, I really do want to be brief. I think the question, we’re gonna talk a lot about the details and which things they got wrong and if anyone can come up with something, something they got right. But the question I think, the really big question is, what on earth are we doing
cutting taxes at this point? We have a U.S. economy which is… Well a Federal Government that is actually at low point in revenue, compared with recent decades. We’re at a full employment
economy more or less and we are taking in less
revenue as a share of GDP than we did the last time
we did at full employment, which in turn was less
than the previous time. And meanwhile the U.S.
government as the saying says, is a giant insurance company with an army. What it basically does is it does defense but then Medicare,
Medicaid, Social Security, all of which which are
largely for older people. And we are getting older, I mean I’m getting older, but the population as a whole. The burden of maintaining the programs that the American people
very strongly want is growing and yet we are cutting away revenue. Now all taxes have some cost, they have some effects on incentives, they’re always… In isolation you can always
argue that there’s some benefit from cutting some tax but you have to pay for things somehow. And is there any plausible
story by which this tax cut at this time makes sense? Something is gonna have to give. And this is only making what was already a problematic situation of
paying for the government we want even harder. – And so Len, we will let Larry go last. I mean yes, Larry is going last. Len is next. All the L’s, three L’s. I think it should be on, just try. – Thank you. Okay well I like tax reform. Tax reform is in the title of this panel and a lot of the advocate for this bill, which by the way is not called
the Tax Cuts and Jobs Act. Democrats were mad and they
were able to strike the name of the law from the legislation, it’s actually a Tax Act
Pursuant to Reconciliation Under Section…blah blah blah. (audience laughs) So we have to come up for
a different name for it. It’s the Tax Bill, the Tax Act That Shall Not Be Named or Tax Voldemort. (audience laughs) So I like tax reform I
think we need a tax reform. The tax code was unfair, inefficient, needlessly complex, wasn’t raising enough revenue
to pay for the government, this isn’t tax reform. Think about it, the key challenges that
we’re facing in the country, one is the red ink as
far as the eye can see. The Congressional Budget Office was already projecting 10
trillion dollars in deficits over the next decade. Another issue which I
think was a big factor in the 2016 election was wage stagnation. The fact that low and
middle income people haven’t seen increase in real wages in decades. It is true that our
corporate tax rate is high by international standards. And there’s a problem
with a lot of loopholes and inefficiencies in the code that were both unfair and
undermining economic growth, so what did we do? Well we added one and a half
trillion dollars in deficits. If you account for the effects of the short term economic stimulus maybe it’s 1.3 trillion dollars. The bill is regressive. Most of the benefits go to people with very very high incomes. It did cut the corporate tax rate. But it also cut the tax rate
on unincorporated businesses, which nobody before this
thought were overtaxed. And what it did was create
the biggest new loophole, certainly in my memory. So I think, and as Paul mentioned, it’s absolutely an insane time to enact an economic stimulus, and certainly one that
doesn’t do much good. I mean you can imagine
investing in infrastructure but that’s not what this bill does. So… What the bill did, well it actually did what
the Republicans wanted, which was they needed to
get a legislative victory, they got it, they got a twofer. They were able to undermine
the Affordable Care Act too, but it didn’t make the tax code better and you know if there’s
a positive aspect to it, it’s that it could do what
Reagan’s 81 tax cut did, which is mess up the tax code so much that it could build some
momentum for tax reform five years down the road. – [Kathleen] Okay, Lily. – Well perhaps I’m piling on but like Len I have been a big
fan of tax reform for a while and have really wanted to see it happen. But this bill I think generally
moves in the exact opposite direction that it should have. We should have been looking at
raising somewhat more revenue to deal with our longterm fiscal issues and the fact that the Baby
Boom Generation is retiring, we should’ve been looking
at trying to support the middle class and low income workers and invest in them and perhaps ask the
wealthy to pay a bit more. And this bill is very
heavily tilted to the wealthy and basically all of the tax cuts that to any extent
benefit the middle class and low income families expire. And then of course by
raising budget deficits it’s putting pressure on cutting social programs down the line. And then it’s also a bill
that was rushed through incredibly quickly and
so there are a number of severely technical issues with it that a Treasury Department and IRS are just beginning to work through. But usually when things of
tax reform is simplifying the tax code, and in most respects I
think this really goes in the opposite direction. As Len mentioned there’s this
new pass through deduction which some people have called
the biggest new loophole in the code and is going to
create an enormous amount of complexity for people figuring out, not just how to file their taxes but how to plan their whole affairs in order to minimize their tax liability. So I think it’s a squandered opportunity and wish we would’ve
done sort of the reverse. – [Kathleen] Okay and I kind
of purposefully saved Larry for last because he has
some different points to put on the table. – Thank you, it’s great to be here. Thanks everybody for coming. So… I think the tax reform has
gotten too much good press and too much bad press. I think, I agree with the other
panelists on the good press that we ignore the fact that the country is absolutely broke. We got enormous amounts
of off the book debts that are not incorporated
in the official debt. So if you add all those in
you’ve got a 200 trillion dollar debt not a 20 trillion dollar debt. So we absolutely needed to
have much higher revenues coming out of this tax reform and that didn’t happen. I think that the panelists are overstating how much of the deficit, addition to the official
debt this bill will produce because I think if you simulate
it with more sophisticated global simulation models, the kind that I’ve developed
with some colleagues, you find that there is
going to be a significant, I believe, in capital
formation in the country. Probably at a 15% increase over time in the stock of capital, probably about a five and
a half increase in wages, and I think that’s going to
offset to a large extent, what would otherwise be an increase in the debt to GDP ratio. So I don’t see this tax bill, which has a joint communal taxation says it’s gonna produce a 1.4
trillion dollar extra deficit over 10 years as being a big
increase in this huge problem. 1.4 trillion over 10 years
is about .6% GDP per year and that’s not a huge thing compared to the really big problem which is these unfunded liabilities are getting bigger every
year by collectively about 6 trillion dollars. So 1.4 trillion versus over 10 years verses 6 trillion per
year, big difference. Now on fairness I think here again, I think that the methodologies
that have been used or are being used by the government and by the think tanks in
Washington are really outdated. They are about 40 years old. They compare young people
who are going to pay taxes in the future with old people who’ve already paid their taxes. They are looking at
people just as a snapshot. They don’t look at their future taxes, just their current taxes, ’cause when you loo at everything I think the way that modern
economics says to do it, I think this tax reform basically did not increase inequality. It’s basically fair in the sense that the share of spending, which is ultimately the bottom line, that the top 1% within each
age group will get to do, hasn’t changed much,
won’t change much at all. The share of the taxes that they’ll pay won’t change, the absolutely
amount of tax benefits to the rich will be larger, much larger than the poor because they’re paying a
lot of taxes to begin with. – [Kathleen] Okay. – But anyway. (Kathleen laughs) – I think yeah. So now we’ve set the table for you and we’re gonna drill down
on a lot of these points. I think you guys are going, “Wow.” but believe me, we’re gonna
come back to a lot of this because everybody touched on very very important aspects of this. And I really want to
start on the supply side, because I think that the supply side, companies, are they going to invest more and will that make their
workers more productive, maybe it will even hire more workers, and this is one of the promises I think of people who support this, cutting the corporate tax rate. I’m sure there are even people
who defend the pass through, the biggest loophole, right. And I think one of the
biggest counterarguments from the very beginning has been at least where U.S.
companies are concerned they’re already holding lots of cash and they have been for a while and they haven’t been investing it, so why would you think that
cutting the corporate tax rate is now going to spur some
big amount of investment. So I really want to start
again on this aspect. Okay. Let’s let Larry start this
time ’cause he is arguing we’re gonna have capital formation and it’s gonna come a
lot from foreign sources, so how is this going to work, specifically what do you see? And then we’re gonna let everybody else tell us what they think of that. – Well we’ve lowered our
effective marginal corporate tax arguably, there’s different estimates, the estimates I think are
probably the most credible, we’ve lowered it from about
36.4% down to about 18.8%. We’ve given a huge giveaway to owners of existing
owners in the processes, this is not a tax reform
I would have penned up, you know it’s not something, I give it a B minus which
is a pretty high grade for you know… So it’s not like I’m trying
to defend what happened. I’m just trying to say, “Here’s what I think the right
simulation model suggests.” There was a big cut in effective tax rates of investing in the U.S. I think we’re gonna get a
lot of capital coming in from abroad as a result of that and a lot of capital staying in the U.S. that would otherwise go abroad. And I think that’s gonna
have a modest impact on wages on about 5.5% over about maybe 8-10 years. Wages will be about 5.5% higher. And I think that’s a good thing. The point you made about
the fact that corporations have been sitting on a lot of cash, I think that’s a little bit off base because when a corporation
has a lot of cash, they park it somewhere in a bank, they get some interest, and then the bank can lend it
out to some other corporation to invest. So I think what we need
to concern ourselves with is not you know, which particular
corporation is investing, we have to understand that
our country as a whole is not investing for itself. Our consumption rate is extremely high, our national saving rate is only about 4%, our domestic investment rate is about 5%, so about 1% of national
income is being invested from abroad into the U.S. We need to raise that because we can’t… Or we need to get our own saving rate up, so we’re saving too little, if we’re gonna get more
capital in our country and raise productivity of workers, we have to get capital from abroad. This reform moved in that
direction, that’s a good thing. – [Kathleen] Okay, who wants to jump in? Paul, you raise your hand first, you go. – Yeah. I have to say, it’s one of
those kind of sad things. I’ve actually been having
fun with the economics of this stuff because… And there is a model. There is a style of analysis that says, “Okay it’s a global capital market, “In the end capital will come in, “You’re lowering the
marginal tax rate on capital “So there will be more
capital formation in the U.S. “So we will have a bigger
economy in the long run “As a result of this.” And there has to be some truth to that. Some of this is going to happen but then there’s a
series of qualifications, first of all, it’s in the long run, this is going to take a long time. If we’re talking about
capital coming in from abroad, we’re talking about
the counterpart of that which is really big trade deficits. So this is a bill that if it works, if it does what it’s suppose to, it’s a bill that produces
huge trade deficits for a decade or more. And those trade deficits
would have to happen through a strong dollar which in itself will deter investments. So this is a long slow process even if it works as advertised. Then there’s a whole series
of things that you want to sort of gear that down. A lot of corporate profits
in the United States are not a return to capital they are a return to monopoly power. And you cut taxes on monopolies and you’re not generating new investment that’s gonna raise wages. You’re just cutting taxes of monopolies and that’s a big issue that’s
looking larger and larger. The United States is
not small in the world. If we are attracting a lot of capital we’re gonna be driving up rates of return all around the world, not just here. And the last point, this is something I’ve been beating on that I have been having
trouble getting people, this money doesn’t come free. If foreigners invest here
they’re gonna be doing it because they’re gonna
be expecting a return, so the net benefit to you as residents is only the difference, it’s basically the tax wedge, now I’m falling into jargon, but it’s the gross domestic product. The amount of stuff we produce here is a very bad measure of
the benefits to the U.S. Because a lot of that is going to end up being income paid to foreigners. Plus, foreigners already
own something like a third of the equity in the United States, so we’re cutting taxes on that. So it’s not at all clear once
you’ve put all that together that even in the long run, we’re gonna be raising the
income of the United States. In any case, I think all of those
things that gear it down, make this a much much smaller thing even, I don’t know whether it’s plus
1% or minus 1% on the U.S. But it’s again, given the
fact that we’re exasperating a deficits problem when
we really shouldn’t be doing that, why? – [Kathleen] Okay, Lily. She picked up hers first, you go Lily. (laughing) – So I think there could have
been a way to do business tax reform that would’ve been helpful modestly for the economy in the longterm. We did have a relatively
high statutory rate and there’s reasons to believe that corporations sort of fixate on
that when making investments. So we could’ve broadened the base, lowered the statutory rate and done that on a revenue neutral or
even revenue positive basis. And I think that you know, wouldn’t have been a panacea
but would’ve been helpful for the economy in the long term. The problem with this bill is
that it looses a huge amount of revenue that may you
know have a small effect on growth in the short term. It’s not as Paul said, a
particularly wise time to enact an economic stimulus. But the estimates by
non-partisan estimators like the Congressional Budget Office are that those even small
positive growth effects disappear over time and potentially reverse. And that there models
don’t account for the fact that this has to be ultimately paid for. And so when we ultimately pay for it, by either raising taxes in the future or cutting spending programs, that’s likely to be a
dragon growth as well. So once again, I think this is just
really a missed opportunity that we could’ve enacted
something much more positive. – I just have a couple
of additional points. One is when Larry said, “That we’re not using
sophisticated models.” It’s certainly true TCP isn’t because we can’t afford
to build these models. But we’ve worked with other
people like Kent Smetters who worked with Larry and
Alan Auerbach in the past and he has a very sophisticated
overlap generations model. The Joint Committee on
Taxation spent many years and millions of dollars building
models that built on work that Larry and others have done. None of those models produced
the kind of big macro economic effects that some of the
advocates have been hoping for and I should also say
that even though in theory you can imagine a rush of
new investment, you know. I think the biggest pro
investment aspect of this bill is the provision it allows
companies to immediately deduct the cost of new investments, so called expensing. And it will encourage them to invest more and if they do a lot of that it would make workers more productive,
it could raise wages. But it’s an empirical question, if you look at the empirical data you don’t see huge responses
to even major tax reforms among countries or even
within the United States. And it’s just on some level I think it’s a good thing, because if you really
needed a good tax system for the economy to succeed, we would’ve been in a depression
for the last 100 years. (laughing) The other thing, on
the point of windfalls, and Paul’s point about foreigners, the tax rate cut a large part of the benefit goes to those foreign
holders of U.S. equities. We just shipped you
know billions of dollars overseas is not gonna
do anything good for us in the short run or in the long run. The other thing is when
you look at the effects of cutting tax rates, you also need to consider
how other countries will respond. In 1986 we cut our corporate tax rate and for a few months
we had the lowest rate among our trading partners, England, France, Germany, all of them cut there rates in response and that reduced the effectiveness of the corporate tax rate cuts. – Actually I just want a quick… Everybody talks about you
know 86′ is the Camelot of tax reform, everyone talks
about how wonderful it was, you cannot, if you look at growth rates
of U.S. potential outputs. Look for supply side benefits, you cannot find it. So the best tax reform that we ever did, the one that everyone talks with awe about how did something so
good happen in Washington, even that one didn’t do anything that we can actually see in the data. – You’re only talking about in practice, in theory it was great. – Yeah. (audience laughing) – [Kathleen] Okay Larry, take it away. – Okay I think you guys are
giving supply side of economics a bad, a bad rep here. (audience laughing) So not all economic models are equally useful for every question. So the models that Len is referring to, that Kent Smetters,
former co-author of mine, developed and is being used, using it for the Tax Policy Center is really a closed economy model where it’s a model of the
U.S. and he runs it two ways. One is where there’s no
rest of the world at all, he gets a result and then he runs it as if the
U.S. was a small open economy, a tiny economy like Bermuda and he gets a result and
then he averages two results which are… I love Kent, I think he’s
a fantastic economist, I was talking to him yesterday,
he’s a great buddy of mine, but I think those are two wrong
answers that he’s averaging. If you average two wrong answers you’re gonna get the wrong answer. (audience laughing) The Joint Committee on Taxation was looking at their
simulation study today, which also suggests we’re
a little economic impact, it’s similar in many ways
to what Kent’s doing, it’s kind of very ad hoc. What I did with some economists
actually from Russia… – [Kathleen] Look out. – Look out, yeah. (audience laughing) Well before we even knew Trump
was running for president, I worked with some economists
at the (mumbles) Institute and in Moscow, for the last three years. We’ve been putting together a global life cycle simulation model. So t’s like the model that Kent has and JCT has but except it’s
got all the other regions of the world, it’s got
17 regions of the world, not just one region. And so all the countries
of the world are combined into 17 regions and each
one’s demographics is modeled and their fiscal policies are modeled. So in the end, and also their productivity growth, and their catch up. So for example, China, we’re adding to the world
population two China’s in the next 35 years. Three China’s by the end of the century. They’re being located mostly
in Africa, subsaharien Africa, the middle east, and in India. All these things matter to
the evolution of the world capital market and so you need
to have all these elements in there and the aging and
the developed countries, all that stuff in there
to really understand how much capital is going to be available to flow into the U.S. So I don’t think you can take the existing model, let’s say my model with my colleagues, the TPC’s model, the JCT
models, the CBO’s model, and just average them and say, “Well the conscientious is
somewhere in the middle.” I think some models are
better for certain questions than others and I like our model. Lily said that there was a huge revenue loss from this reform, well the static revenue loss
by the JCT is over 10 years, people didn’t kind of catch that, it’s not over one year, it’s 1.4 trillion, it
seems like a big number, but GDP over 10 years is gonna be probably 250 trillion dollars, so we’re talking about .6%
GDP on an annual basis. So it’s not nothing and
Paul and everybody else is absolutely right that
we needed to have a revenue increase of probably 4% of GDP forever to try and deal with what’s coming. And the bankruptcy that we’re
inflicting on our children. I agree with that but I don’t
think we should overstate what just happened. I think we’re gonna have capital inflows, I think we’re gonna have a wage increase. It is true that there’s been a giveaway to certain monopolies but I still think U.S. workers are gonna
get a wage increase, 5.5% probably by within to eight years, one time, not for every year. And otherwise we kind of agree. Yeah. (audience laughing) – Can I make a really quick point? Which is I really think
we’re underestimating the revenue lost from this bill. It looks like it’s smaller than it’s intended by its advocates because most of the
provisions expire in 2025. People in Congress have
said that they’re absolutely promising that they’re gonna extend it and make it permanent. And the revenue loses
understated over the long run because there’s just one
time windfall from taxing foreign profits that
have been held overseas and that’s not gonna be
repeated, it can’t be. Maybe it’s small relative
to the size of the problem but Will Rogers once said, “That when you find yourself in the hole, “The first thing to do
is to stop digging.” And we’re in a big hole. (audience laughing) – One more thing to add to that.
– Sure go ahead. – In addition to politicians
are already saying, “We’re gonna extend all
the expiring provisions.” which would lift the cost of this bill over 2 trillion dollars. There’s also good reason to believe that the estimates are low balls. And this is not an insult at all to the Joint Committee on Taxation, which I think does extraordinary work, but we’ve already seen a number of states around the country, for example, talk about how they’re
gonna try to get around the limitation on state
and local tax deductions. It seems very likely something like this passed through deduction. There will be a lot more gaming that ever could’ve been anticipated. So I think that modelers do their best job to guess how this will be gamed but when you put all
of the best tax lawyers of the country on the case, they’re gonna find ways to
really expend that revenue. – I’d like to ask a very
unsophisticated question. And don’t blame it on my
Stanford education in economics, but I’m thinking, you know people, if you look at for example, we saw this, there’s been
a big consumer confidence has seemed to have been hit by tax cuts, in a positive way. We saw the big rally in equities, which is probably gonna continue, big optimism that yes this is
going to make a difference, and business confidence, so you know, riddle me that, answer me that, is that whole sense that
people have and businesses have that, “Dang they’re gonna
cut taxes, this is great, “We pay too many taxes.” And of course most people seem
to feel that anyways right. But I mean what is, is there going to be any impact from that? Plus, the other part of it would be, “Oh my God, even if I get
a little cut in my taxes, “I’m gonna spend that.” And you know, who’s gonna spend that, rich people or poor
people, well who knows. But there’s that aspect of it too and if I am a worker I think I might say, “Well you know, so what if
rich people got a big tax cut.” And again, way more money back than I did. “If they hire people, if my wages go up, “If I’m doing better at the end, “You know five years whatever “Then I don’t care if those
rich people got that.” You see, so how do you answer all those, how do you fit those in? – I don’t know whether you… Let me just say, now we’re mixing in demand
side with supply side. So one question, is how much is this going to expand the economy’s ability to produce? And the answer is probably a little, although I’m not sure. Unless we’re you know, each of us loves our own model
but I actually think that I don’t buy the ones
that give you huge gains but I think that there’s
some potential GDP will rise but the immediate thing is well yes there’s gonna be more spending. We think, probably. But and that would’ve been a great
thing if that was happening in 2010, when we had 9.5% unemployment. Now we have 4% unemployment. It’s… We don’t know how much lower it can go, wages are still not rising but on the other hand a lot of indicators, things like quit rate starts adjusting and this really looks like a… And in some ways it doesn’t matter what the reality is what matters
is the mind of Jay Powell, the new Chairman of the Federal Reserve who will respond to any
faster economic growth by hiking interest rates faster, which means that most of this stuff is going to have very limited effects. Whatever increase consumer
confidence and so on is just not gonna do very much for growth. It’s a world of difference for when you have a deficit spending in a depressed economy and when you have deficit spending in a full employment economy. I just add that what people say in consumer
confidence surveys, what small businesses say, even what stocks do, is one thing, we’re still waiting to see
whether this translates. And for what it’s worth, orders for capital equipment
have not gone up at all. So that the first early
indicator of an investment surge is just not happening yet. Now it’s two months in but still, we’re not seeing it yet. – Just on the stock market surge, I mean, you would’ve expected that
just based on the rate cuts where all these companies
that have made it, it’s that windfall that
we were talking about, companies made decisions assuming that their income would be taxed at 35% and now all that income is taxed at 21% that automatically raises the value of a lot of profitable companies. That’s not something that, that’s a one time shift up, I’m not… I mean if I could predict stock prices I’d be a lot richer than I am. (Kathleen laughs) But I wouldn’t count on that continuing. The other thing is, there’s been this rash of good news that people have talked about as evidence that the tax cuts are working, wages are going up, companies are paying bonuses, that is what you would expect to see at this stage in an economic cycle. Labor markets getting tight, companies wanting to keep their workers, bonuses make more sense
than wage increases because you’re not committing
to pay a higher compensation in the future and there’s
a lot of uncertainty about whether we might be going
into an economic downturn. And you have to pay high
wages to attract more workers. And of course if you’re a big corporation and you’re doing this and
you want to carry favor with the president you say, “Oh yeah, the tax cuts made me do it.” But we would have seen that anyway. – I’ll talk a bit but I had a little bit of fun
with a blog post yesterday. Talking about how on February 19th Walmart announced big wage
increases for you know half a million workers and the tax cut is working. I said, “Oh wait, that’s
actually February 19th 2015.” (laughing) There’s always somebody
increasing wages somewhere and there’s every incentive
to say, “The tax cut did it.” – [Kathleen] Okay. – I think it’s helpful
maybe to distinguish here between the direct effects of the tax bill and the indirect ones. So if you look at the direct effects on employee compensation or taxes on their wages for employees, so you’re not looking at the
business provisions of the bill then you see this is an
incredibly regressive bill. For example a household
earning $40-50,000 on average is getting a tax cut of
maybe 400 something dollars, a millionaire is getting an
average tax cut of $27,000. So then you can add on
the indirect effects. And the Joint Committee on Taxation, we keep talking about, which is the official non-partisan score keeper for Congress, they incorporate those indirect effects and they assume that 25% of
all the corporate tax cuts are going to benefit labor and even when they
incorporate those effects they still find that the bill the tax cuts for the wealthy
are three times or more larger than they are for the middle class. – [Kathleen] Now do you
mean in absolute terms or? – This is as a shared income.
– Shared income. – Yeah, it’s still so… So if you’re a millionaire
you get three times as much as a share of your income in tax cuts even if you assume that a
bunch of that corporate tax cut is accruing the the benefit of employees. And that’s just in the near term, if you’re looking at the long term when all of these
individual provisions expire you find that every income group earning less than $75,000
on average looses out. Now you could say, “Well the
republicans already saying “They want to make those
individual provision permanent.” But it’s still regressive
if they were permanent, plus you eventually are gonna
have to pay for these tax cuts and that’s probably gonna make
the effects more regressive. – [Kathleen] Okay and
before I let you jump in I want you to remind you and this is your time there are gonna cards passed around so you can start writing questions now. We are gonna keep going
with the panel for a while but whatever is on your mind that you really want to hear you know developed or whatever. Or even something maybe you
haven’t heard us touch on yet, now is your time to start
writing down those questions. Go ahead Larry. – Yeah, I don’t think that
this tax reform is regressive or where we define regressivity the way that you know
economics defines it as what happens to the pattern of tax rates, net tax rates, as you go up the resource distribution. What happens is all of the tax rates declined and what that means is that a little bit not a whole lot actually and what that means is that
since the rich have more resources to begin with
the same percentage decline in their tax rate means a
bigger absolute tax break. But we wouldn’t define that as regressivity, we’d say if the pattern of the tax rates hasn’t shifted, hasn’t become steeper, flatter, the thing is still as
progressive as it was. Another way to look at this is look at the inequality in spending, are the top 1%, if you look at any cohort, gonna be spending as a
result of this tax reform, incorporating the wage increase or not incorporating it, and by the way I’m assuming in my analysis that the changes are
permanent just to be clear, the share of spending in the top 1% stays almost unchanged. The share of the taxes that
they pay stays almost unchanged, so I think that we’re actually branding this reform incorrectly. We’re branding it as
incredibly regressive, it’s not gonna have an economic impact. I think what we should say is it’s you know a second rate reform not because of those concerns but because it didn’t raise revenue and because it’s probably
gonna undermine pubic education dramatically in all the blue
states around the country and because it’s probably
gonna dramatically undermine Obama Care and lead to another
10 million people uninsured. And those are the real
concerns with this tax reform. But the reforms we’re focused on, I think we’re just kind of overdoing it. It’s kind of, it’s just not true, I don’t think it’s true that this thing is not gonna
have a good economic impact or be highly regressive. I just don’t think that’s
substantiated by the facts. – I just really want to
push back on this notion that it’s not regressive. I absolutely agree that we should not look at
regressivity in dollar terms so with you know with ever household whether they’re a millionaire
or earning $20,000, got a thousand dollar tax cut, I wouldn’t think of that
as a regressive tax cut. But if you look at the official estimators and at the percentage change and after tax income
it is much much larger, it is three times larger for the wealthy as a share of their income than it is for the middle class. – But the official estimators by the JCT by the TPC, they’re all looking at kind
of the wrong calculations, sorry, they’re looking at what
I’m paying in taxes this year as a share of my income this year, but I’m gonna be paying
taxes the rest of my life and they’re throwing together 20 year olds and 80 year olds, you get a totally distorted picture of progressivity by looking at taxes that way when our profession has just moved along over the last 40 years. We’re doing tax analysis the
way we did it 40 years ago, but people are gonna
be affected by this tax for the rest of their life. And young people are gonna have
to pay taxes in the future, they should get credit
for that in the analysis and old people aren’t going to be paying, you know have already paid their taxes, so you should compare people
within their same age group. And when you do that you just don’t get that kind
of picture you’re describing. The paper is going to
be posted kotlikoff.net it’s joint with Alan Auerbach. He’s certainly no republican, I’m certainly no republican, and we’ll have that on our website, my website, kotlikoff.net,
in about a week. I think it’s gonna be the
best modern analysis of this. – [Kathleen] Okay. – I just want to say I don’t… It’s impossible to settle this thing but there’s a
– A dual. – You’re wrong but it’s impossible for us to settle this, right. (audience laughing) What’s really critical here is to say, and I think this is
very important to some, that the revenue loss will have to be offset somehow. And if you try to think
about where that comes from it’s going to mean less
spending on social programs. So if we actually ask
what is going to happen to after tax and transfer
distribution of income, then it’s clearly regressive, all of these others things
in a way pale beside the fact that this is going to further
impoverish our government that’s having trouble paying
for the programs we have. – I agree with that. – Larry did one thing when
he was talking about this which I guess I want to respond to, is this idea that the share of taxes that are being paid by each income group and the argument was well
the high income people are still paying the same share, I don’t think that’s right, but even if it were true this is a deficit finance tax cut and what we’re doing we’re
cutting the most regressive elements of the tax system, the individual income tax, corporate tax, estate tax, and relying relatively
more on regressive taxes, payroll taxes, excise taxes,
and of course whatever taxes are coming to offset this or
spending cuts that are coming to offset it over the long run. The other thing is just in terms of which is the right model to use, I really applaud the effort
that you and Alan went to to try and build a life cycle model, but there are some heroic assumptions that are built into that I think, I haven’t looked at it in a while but I think you started with
a survey of consumer finances, is that right? It’s like 4,000 records or so. – 6,000 records. – Okay, so and you’re
creating lifetime profiles which requires a whole lot of assumptions and it produces the results you described. The last time we actually
looked empirically at data over time to try and see whether that was a lot different from what you get when you
look at a single year’s data was a paper by Joel (mumbles), it’s quite old because
the IRS hasn’t released panel data in a long time. But what they found was that looking at a single year’s data and data averaged over a number of years, the averaging over time reduced
the overall regressivity of the tax system or tax changes but the differences
were relatively modest. I would love to, there are panel data behind
closed doors at the IRS and it’d be really nice
to look at actual data for tax payers over 20 years and I think that would help
to resolve this question. – [Kathleen] Just get in
touch with some Russians and they’ll just hack right in. (audience laughing) – [Paul] Quick response. – Sure. – [Paul] By the way can I just add. I don’t think we spent
enough on Lily’s point about the gaming of the system. – [Kathleen] Okay. – That with this is a widely, I mean, this was literally written in a few hours in the dead of night and it’s with probably bad thinking
even if they had more time and now there’s one thing
America really leads the world in is it’s smart tax lawyers and accountants and the havoc they are
going to be able to reek exploiting all of the
loopholes that were created in this legislation is going to mean that the true cost will
probably be a lot bigger than we are talking about. – [Kathleen] Did you
want to comment on that? – Just really briefly, back to Len here. – [Kathleen] Briefly. – Yeah. You don’t know exactly what’s coming so you really want to look at the expected impact of
this bill on people, so you want to look at where they are, what they’re likely to earn in money, and what their assets are
and project things forward including their spending, so I think we’re doing
it exactly the right way. I don’t think that looking
at actually realized outcomes in the future would capture
what we’re trying to get at when we’re trying to
assess the progressivity of this system you really
do have to do a projection for it to be a sensible analysis. – Okay, Len do you… In terms of the gaming and maybe mainly in terms
of accountants and lawyers making out on this, which they always seem to do, you know it’s a great career path, right. But it seems that one aspect is gaming, one other one is if it
gets more complicated instead of more simple and of course that was one of the hopes and Paul Ryan was gonna
make it simple enough to put on a postcard, right. (audience laughing) A postcard right, yeah the jumbo postcard. Right. So is that part of the… Does everybody agree that
this is not a more simple or do you see simplification in here? – There’s certain simplification elements at the personal side but yeah I think the pass through
stuff is very complicated, I don’t think it’s gonna
have as big a game play, I think it’s gonna be
great for Donald Trump, I think he probably gave up Bannon to get all those real estate provisions, but I think for most people
there’s not much of a game there because you’ve got all
kinds of counterfeit countervailing things, you know, you try and take it but then
you can’t make this criteria so I don’t know how big of
a game that will be to play. I’ve certainly tried to play it and I can’t figure out how to do it. (laughing) – I mean I think there’s gonna be huge and already are huge gaming opportunities. So we’ve you know already
seen even just in the few days that it was enacted, everybody was debating should I prepay my property tax and now all these. – [Kathleen] There was
some debate at the IRS how much they would let people do that. – Right, whether that would work and nobody knew and they had you know they’re trying to figure
this out over the holidays and now all these states
are trying to figure out how can we avoid the
limitation on the state and local tax deduction and it’s unclear if
that’s gonna work legally and which versions are gonna work legally and whether it’s gonna be
worth it for an employer to take up the election
if the state creates it. And then the one thing that
probably worries me the most is this pass through deduction because it’s generally providing the largest benefits to the wealthy, so the top
1% earns 50% of pass through business income. – I’m not sure everybody is aware, even here, knows what the pass
through deduction is, right. – Okay. So the pass through
deduction is a 20% deduction if you get income from
a pass through business which means
– And what’s a pass through business? – Which means it’s a sole proprietorship so you just own your own business, you’re the only owner. – [Kathleen] Doctors? – Partnerships or something
called an S corporation. – Not doctors. – [Kathleen] Huh, doctors don’t get it? How’d they loose out? – Not economists. – Well no some doctors do but it’s basically a kind of business where it doesn’t pay the
corporate income tax separately instead all of its profits
are immediately taxed to all of its owners and so Donald Trump has by reports over 100 pass through businesses and lots of huge businesses
are structured this way. There’s also small businesses
that are structured this way. And the provision says for
all that business income you can right off 20% but there’s a few guardrails, if you’re hiring, the problem is they’re
probably not gonna have a lot of force and then the other problem is that you cannot get this
if you’re an employee, so if you know you work
at a department store and you say, “Okay why
doesn’t Bloomingdale’s “Pay Lily LLC, “Then why can’t I get this
pass through deduction?” I can’t because I’m still an employee. The only way I can do that is if I become an independent contractor. Which you might think, “Okay
maybe that’s worth the hassle.” But in the process you’re
probably gonna have to give up all of your employee benefits like any health insurance,
like life insurance, disability insurance,
workers compensation. – But Lily you can’t be a
service worker and get this you have to have capital so there are restrictions that
go beyond what you’re saying. – No there’s no restrictions
if you earn under $315,000, so that creates a huge question for the vast majority of
the American population, which is not simplification. – Well there is some evidence
on how people respond to differences in taxation
of business income and wages and salaries you know. Famously John Edwards and
Newt Gingrich got into trouble for trying to add the
2.9% Medicare payroll tax. They pretended that their
income was return on, it was basically business
income rather then compensation. Donald Trump, we haven’t
seen his income tax returns, but… He filed a financial disclosure form and in the year in
which he was at his peak on The Apprentice program which I hear is a very popular
program back in the day, and also heading this what
he said was very successful multinational organization
he reported $14,000 of wages, and if actually that’s what he reported on his income tax return there’s no… I’m not surprised that he’s being audited because it was kind of wrong. (audience laughing) But it would have saved
him a lot of taxes. And that was at a 2.9% differential. 37% tax rate, if you can deduct 20% of that, that means you take 7.4% off, so you’re effective rate
is instead of 37% it’s 30%. Plus you say payroll taxes too. There’s a huge incentive to try to take advantage of that loophole. Now it is true that there
are these guardrails that are built around it. And there’s lawyers
who’ve proven themselves to be incredibly effective at
finding ways to take advantage of such differentials. It’s just not a good idea. And there wasn’t really
any economic reason to do it in the first place, other than the imperative was political to say, “Well we’re
gonna cut corporate taxes “Because corporations
are over taxed relatively “To pass throughs.” and the pass throughs say,
“Well that’s not fair, “You should cut our taxes too.” – [Kathleen] Okay. – And I’m a little scared here because you guys understand
this stuff better than I, but as I understand it, if I instead of drawing a
salary from the New York Times become a contractor Krugmanomics LLC which sells the service of column writing to the New York Times, that then becomes a pass through business. Now that according to the
guardrails does not qualify it’s providing a service
but if it operates out of an office building that I own and it pays exorbitant rent
to me real estate company so that Krugmanomics LLC
barely makes any money at all but my real state company
makes an enormous amount that gets me the big tax break. And if I can come up with that, you can just imagine what
highly paid tax lawyers are gonna come up with. – [Kathleen] Okay. – So actually… – [Larry] You’re gonna
co-author with the other New York Times writer. – So actually you can
just form Krugman LLC if you make up to $315,000
and as long as you give up being an employee no problem. But above that, hopefully
you’re making more than that, then you need to create your
real estate tax shelter. – Well you know the IRS
has on overarching rule that says if you engage in any activity that for tax purposes, saving taxes, you’re subject to criminal charges. – Oh no, that’s not true. – Well from what I understand. – There’s the economic substance doctrine but it’s barely ever
successful in the courts and they have a 1% audit rate. – Well renting himself just
to sit in a small office or even a big office, one by himself to write his columns, I don’t see that as gonna pass the test. – Are we ready for some
audience questions? ‘Cause they’ve got some
really good questions, okay. And here’s the first one. Is there a point at which our debt will begin to freak out, I love that term, the equity market and I
guess this is almost like an investment question, any idea when? Like I’ll ride the rally. (audience laughing) So who wants to jump in? – I can answer that one. Our debt is 200 trillion. It’s not 20 trillion, it’s 200 trillion, that’s the fiscal gap, that’s the (mumbles) difference between all the projected outlays, projected by the CBO and
all the projected receipts. 200 trillion we’re short. That’s 10% of GDP forever. So the country is absolutely bankrupt, we’re probably in the worst fiscal shape of any developed country. Certainly any developed country probably worse than Greece
to tell you the truth. And that’s because we’ve been keeping all these obligations off the books. If you just look at the Social
Security Trustees report that came out in July, they’re reporting a 34 trillion
dollar unfunded liability, that’s you know much
bigger than the 20 trillion in official debt. So we are broke and we
were broke decades ago. And we have to do fiscal gap accounting not deficit accounting. If you go to a website
called theinformat.org T-H-E-I-N-F-O-R-M-A-T, theinformat.org you’ll see that 20 Noble prize winners, I hope Paul is gonna make it 21, have endorsed doing fiscal gap
accounting on a routing basis because the other
accounting that we’re doing is completely arbitrary,
it has no economic basis, and when Shakespeare said,
“First shoot the lawyers.” He should have said, “First
shoot the accountants.” – [Kathleen] Okay. – I have a one word answer which is Japan. You want to think about, you know, Japan is your (mumbles) case. I mean Japan has debt which is, face debt is 200% of GDP. They have obligations, they have demographics that
make ours look like paradise. They have a working age population that’s shrinking at 1.5% a years. They are paying no premium
at all on their bonds. People, the trade, shorting Japanese debt, people used to do that a lot, assuming that they have
to be hitting a limit and the trade ended up being
called the widow maker. I don’t know if anybody
actually committed suicide from loosing money from it but it was always a bad. Advanced markets appear to
believe that advanced countries that borrow in their own currency and have reasonably stable governments and are not run by complete idiots. (audience laughing) We may have lost
ourselves here but anyway. They have awesome capability
to get their house in order and are willing to give them
enormous amounts overall. – [Kathleen] Can I knit
pick just a little bit but don’t the Japanese own
a lot of their own debt and don’t a lot of their
citizens buy the debt and hold it. – Even the net debt is still Greek level. – So it is true that with
the Japanese it is very high and it’s also true that
most of it unlike our debt is or almost all of it is
held by Japanese people but the thing that actually scares me is that there won’t be any
response for a long time and we are still the richest
country in the world. We have a lot of capacity to borrow. And policy makers have clearly decided that while they really
care a lot about deficits when the other party is in power, they don’t when they are. And they haven’t had to
pay much of a price for it because interest rates are so low, there’s a lot of capital available
in the rest of the world. I think it’ll be better if
there were a market response right away if interest
rates started to go up, that would effect equity prices. That actually happened
in the early 1980’s. 1981 Reagan passed a tax cut that was much bigger than this one. And interest rates started to go up and people on Wall Street, including influential republicans like John Snow who was head of CSX, a future republican treasury secretary, went to Reagan and said, “These high interest
rates are killing us.” And people don’t remember
that remember that even though he passed a huge tax cut, he also passed really big tax increases in ’82, ’83, and ’84 and actually
gave an impassioned speech saying that we have to deal with this or else we’re gonna wreck our economy. If we don’t see an interest rate response you can imagine debt
going up to 200-250% GDP. And Paul actually had something a long time ago that haunts me, this one Wile E. Coyote moment where the road runner is running along, this is our debt, the
metaphor for our debt, and then all of a sudden
realizes he is over the cliff. And then
– The fiscal cliff, yeah. – With a pause, falls. And I want to actually fall when we’re just on a slight incline rather than a cliff. But if it doesn’t happen until, there are economic models where interest rates stay really low, it’s basically the mortgage bubble model. Basically everybody says, the mortgage market who’s
house prices are growing at 15% a year, mortgagors could lend money to
anybody that was profitable, they could just foreclose if they couldn’t make their payments. And that worked for as
long as house prices increased at 15% a year, once house prices stopped growing then lending standards tightened which meant that there
were more foreclosures which reduced the demand which
pushed down housing prices and then there was a crash. You can imagine the same
thing if interest rates are 2-3% we can borrow 500% of GDP, if interest rates start to go up we’re a less good risk and you could imagine very very quickly our foreign lenders deciding that we’re no longer the safe haven investment and unfortunately we don’t
know when that happens but the farther in the future it is the worse it’s going to be. – [Kathleen] Okay. I would just like to say that
my observation over the years watching financial markets is that this is totally the kind of thing that won’t be a problem until it is. It’s sort of like when your doctor says, “You can’t drink so much wine, “You gotta not eat
that, you gotta do this, “Or you’re gonna have a heart attack.” Well a lot of people until
they get the heart attack they really don’t change their ways and I think investors are
kind of like that you know. And your question is very apt because that’s what everybody
is asking themselves, “How long can I ride this?” You know keep looking because you know as long as it’s going up it’s gonna go up and it’s just very
difficult to ever predict what’s gonna change that. – Yeah just to reinforce that. I spoke to about 50 bond traders about a year ago explaining to them how
broke the country was and they came around to
the view that I was right and then they asked me at the end, “Can you tell me five minutes before “The other traders learn this?” (audience laughing) Not that they learn it,
when they trade on it. So all the traders are trading on what they think
other traders are trading. Cane’s told us that, “If you loose money in a
group you keep your job, “If you loose money by
yourself, you loose your job.” And Bill Gross from Pimco lost his job because he
basically bet on the realities and not what other people were saying. So this thing has the potential
to change in an instant. Just like you were saying. – Yeah, we’ll see. – Heart attack and hit. – Okay let’s move on to this question. I think we’ve kind of touched on. But what do you think of
the impact of eliminating the other deductions, the state and local, the interest payments, etcetera. I think maybe it is worth
going a little bit into because I think you all share
a concern about what this is going to mean for programs
that are so important to so many people and that
it’s gonna make it much harder for many states and localities to fund really important things. Anybody want to jump in? – I’m not sure if the
question was just about state and local tax deduction but one interesting thing about the bill is how many fewer people are
going to itemize deductions. And that actually is probably gonna have a significant on charitable giving because there will be a lot less people who are claiming charitable deductions. And there’s some evidence that
people do respond to that. There’s also of course the reduction in the home mortgage interest reduction, which you know may have some
small effect on home prices. – [Kathleen] Yeah. – And you know going to the state and local tax deduction issue again, that’s just gonna create a
huge amount of uncertainty in the states that are
contemplating different legislation, but generally the state
and local tax deduction was a pretty regressive deduction so loosing that is something
that is disproportionately affecting more wealthy people. – I think it’s really hard
to tell what the effect is. I think people are
concerned that if the state and local tax deduction is limited that high income people are
gonna be less supportive of public programs or require higher taxes and it’s certainly possible. I think Larry eluded to
that in his comments. We don’t really have any
empirical evidence on it. Although I guess we will get some. But one point to make is that the same local tax deduction
was already limited under prior law and that was
by the Alternative Minimum Tax and it’s giving a
fraction of upper income, upper middle, and upper income people, were not getting the
full benefit of the state and local tax deduction
or maybe even any at all because the way that… One of the bad things about our tax system which actually wasn’t fixed in this bill is that you have to calculate
your taxes two ways, one is under one set of rules, where you can deduct state and
local taxes and other things. And then under this alternate set of rules where state and local
taxes were not allowed it’s the Alternative Minimum Tax, and if you owed high tax
under the second standard then that was what governed
your tax liability. It’s true that many fewer
people are gonna be subject to the AMT but the AMT already
limited state and local tax deductions for a lot
of high income people. So maybe the impact is less
sever than people are expecting. – [Kathleen] Okay. – I think the whole question
of what do we ultimately mean by regressivity come in here as well. I mean state and local tax deduction directly tends to benefit relatively high income
people in blue states. So in that sense getting rid of it are hitting people who
are pretty affluent, my neighbors basically, right. But what do blue states do
with the revenue they raise? And the answer is well they
actually pay more on education, they pay more on social programs. So if you take in the ultimate
indirect effects on programs I think eliminating probably
ends up being regressive, ends up hurting you know
the cost to the kids who won’t get preschool programs is gonna be a much more important factor than the cost to the doctors and lawyers who are not getting the deductions that they were getting before. – Okay. Let’s try to do a little bit
more of a lightening round ’cause there’s a few more questions. What if there was a radical
tax cut for the middle class, I was kind of touching on this I think, not the top segment of income earners, wouldn’t this benefit the
economy and people in new ways? – Give it one more time. – Okay, what if there was a radical tax for the middle class, right. And in fact, we were talking
about how little it was. What if in this whole bill say, somebody just said, “Oh
let’s really slash taxes “For lower income people.” Right, would this benefit, or actually wouldn’t
this benefit the economy and people in some new ways? So let’s get a quick comment
from everybody on that. – No, no, we have a government. We want the government to do things. It means we have to collect taxes, that includes middle class people. The idea that there is… Why are we cutting taxes? We have these responsibilities, so no. – [Kathleen] Okay. – So a net tax cut I
think would be a bad idea. One of the things the
bill didn’t deal with was the stagnating incomes
to middle and bottom and I actually have a
paper that I’m working on proposing a value added tax
to pay for a wage credit that would benefit low
and middle income workers. Basically it would offset
what the market’s not doing. And I think one of the big
challenges or us going forward is figuring out how we can
deal with an economic system that really is just leaving large spots of the population behind. Something, not the net tax cut, but doing something for the people in the middle would be a good thing. – [Kathleen] Lily. – I think it depends. So if it were paid for, if it was a big tax cut
for the middle class paid for by higher taxes on
the wealthy then probably. If it was not paid for but it was particularly well targeted. You know if it was a childcare tax credit that was really going
to improve the quality of childcare investments
those have a lot of longterm positive impacts on children earnings. So I think it’s possible but it would really depend on the details. – [Kathleen] Okay. (loud clapping) There we go, it must be
that he asked the question. – Well I think we can fix
the tax system dramatically and in a much better way
then what was just done. We have very considerable inequality, spending inequality, it’s much less than wealth inequality because the fiscal system is progressive, labor earnings are more
progressively distributed than with wealth but we still have a huge
problem with inequality, you can see that on the streets of New York with people begging, so we need to address this but we also have to understand that we’re addressing everything piecemeal, we have about 21 different
federal and state programs that are each of which is
a different fiscal system. Think about food stamps. If you’re earning too much
money on food stamps you loose 23 cents on the dollar, you loose 22 cents on the dollar on the earned income tax credit. You loose 15.3% on the
dollar from the payroll tax. So if you’re a poor person
forgetting the income tax, if you’re a poor person you’re already in like a 50% marginal
tax bracket into account include New York City sales taxes. All these thing impact
your incentive to work. So we need to hae a reform that actually ends up putting
everybody into a tax bracket that’s not crazy high that doesn’t lock poor
people into poverty. Now I you want to see such a reform and it would involve value added taxes and a progressive consumption tax and a carbon tax. If you got to my website kotlikoff.net I’ll do a little free advertising. – Okay, so you’ve also…
– There’s a book called Your Hired! A trump Playbook
for Fixing America’s Economy, Trump had nothing to do with it. – [Kathleen] Okay so you’ve also answered the second question so you
don’t get to answer this one in the tax round. If you could adopt, well actually you kind of
did too Len but less broadly, and only unless it’s really quick. If you could adopt tax
code from another country, which country would it be or not be? But I also think more broadly. Ideal tax if you were given you
know you’re the tax star and you could just put in, in a nutshell what would your
ideal tax system look like? I think you just told
me a big part of yours we’ll let these guys go. – Okay. I’m gonna sound
like Bernie Sanders here. Denmark. If you look at Northern European countries that have been much more
successful at preserving a middle class than we have, they actually have… There tax systems are not
especially progressive. They rely heavily on value added taxes which are a slightly regressive thing. But they use that to
finance a lot of benefits that go way up the income scale. And that’s the way to do it. I mean their tax systems
are relatively flat. So that the distance stunt
that’s created by the tax system are not that bad. They are used to finance strongly progressive social programs which because they’re not as
severely means tested as ours, don’t create those really
high marginal tax rates at low incomes either, so yeah. Denmark with better weather. – I hate to agree with you Paul. (audience laughing) – Oh I must have screwed up, oh okay. (audience laughing) – I mean the key point is that you shouldn’t just look at the tax system you should look at the
spending system too. And everybody else
except for oil countries and failed states have a value added tax and it’s not because they hate poor people but because it finances
essential government services and it does it in a way that doesn’t take a huge toll on the economy. – [Kathleen] So you’re
saying you’re in favor of a consumption tax
that is progressive, no? Did I misunderstand? – Yeah I think just
focusing on the tax system to do everything I think is wrong. But we’re also not Denmark. We’re not gonna have taxes at 50% of GDP. And you know having the social compact that the government provides so much and the people are willing
to pay very high taxes to pay for it is probably
not gonna happen in the U.S. – [Kathleen] Okay, so Lily. – I mean I agree that I tend
to look at the fiscal system together so both the tax
and the spending programs and to some degree it doesn’t
always make a difference which one it is but in
general I think we should be you know raising, asking
the wealthy to pay more, and investing more in low
and middle income families, particularly things like
childcare, paid leave, I think we should get rid of
the step-up basis loophole. I could run through a whole list but it’d get really nerdy for everyone. – [Kathleen] Okay, and
we’re suppose to finish but I have to ask this last question. And again, really quick. What do you think is
happening with public opinion, will this help the republicans or the democrats this November? – I don’t think anybody knows. There was a big tax cut, it was a part of the economic stimulus that Barrack Obama pushed through and the majority of
voters according to a poll thought that their taxes had gone up. So… It will be interesting to see
how this plays out in 2018. – I think yeah. It’s so complicated and there are few other things in the news which are kind of distracting, I mean it’s kind of a… We used to talk about you
know the one week news cycle and the one day and now it’s
kind of a two hour news cycle. I have a suspicion that this tax law is just gonna be totally
swapped by other stuff. – Well the Russians really like it. (audience laughing) – [Kathleen] Anybody
else want to weigh in? – I think it’ll modestly
hurt the republicans. I mean I think people are
understanding that this is pretty tilted towards the wealthy but I’ve also seen polling that they basically support for the bill almost perfectly correlates
with support for the president. So I think this is capturing a lot of other things beyond taxes. – Yeah I think the record suggests that, and I’ve heard this, that I you loose relative to other people, you’re unhappy about any tax change, if you’re both loosing together, you’re okay, or if you’re both winning together, and one of the things that
we haven’t talked about is the fact that there’s so many different
things going on in this bill that there’s a certain
amount of dispersion, if you look in the same cohort within the same level of resources, you’ve got some households
are getting an 8% increase in spending and some are having a negative 2% increase in spending. And I think that’s going
to lead to some animosity and some anger and well it should. – [Kathleen] Okay. Well, thank you. (audience applause) Another happy birthday to
Janet Gornick and Paul Krugman. (audience applause)

1 thought on “U.S. Tax Reform: Where Are We Now?

  1. Not all super-rich and their companies are equal in their capabilities to grow the US domestic economy. Thus, not all super-rich and their companies should get the same tax cuts.

    Applying the Pareto Principle in a dogmatic fashion, the 80/20 rule proposes that 20 percent of the super-rich and their companies produces 80 percent of the growth, while 80 percent of the super-rich and their companies produces only 20 percent of the growth.

    This is analogous to the traditional illustration of the Pareto Principle's 80/20 rule where 80% of sales are made by only 20% of the top salesmen, while the rest of the 80% salesmen only bring in 20% of the sales. The implication of the 80/20 rule in this salesmen case is to concentrate on, and to reward greatly only on the top 20% of the salesmen who bring in 80% of the sales revenue with pay raises, bonuses, and promotions, while obviously giving the rest of the 80% salesmen who are must less productive with less pay raises, bonuses, and promotions. This may be called a merit based system.

    It is obvious, and common sense that the CEO will not give all the salesmen the same pay raises, the same bonuses, and the same promotions, as not all salesmen perform at the same high level based on the observations Pareto that only a fifth of the people are top producers. Only in a Marxist system will people be rewarded the same amount by ignoring the vast differences in people's contributions. By giving the same huge tax-cuts-for-the-rich in the same amount across the board ignoring whether the recipients of the huge tax cuts contribute or not is similar to the Marxist system, which is not merit bases, but rather is needs based. The Marxist soviet system had been relegated to the dust bin of history, but the US conservative Republican Party is ignoring the news. It is ironic that President Reagan who was instrumental in relegating Soviet Russia to the dust bin of history is the one promoting the same none merit, and Marxist like system of pampering the super-rich and their companies with blindly giving out free tax cuts like the Soviet Marxists. Perhaps working as an actor, rather than working as a salesman in companies, he had not heard of the 80/20 rule, which is based on the Pareto Principle.

    Those who don't know history are doomed to repeat it. Those who are blinded by the greed of free tax cut money are also doomed to repeat the pitfalls of history. Of course, the 80% of the much less productive super-rich and their companies will claim that they are as productive as the 20% of the real productive, and therefore, the 80% of the much less productive super-rich should “deserve” the same huge amount of tax cuts as the 20% productive. Who don't like getting free money for doing nothing.

    The Libertarian, Tea Party, Republican conservatives claim that the public section government contributes nothing, while the private sector businessmen contributes everything. Using an expanded interpretation of the Pareto Principle's 80/20 rule, there should be a 80/20 split in contributions from private and public sectors. It is 80% of contributions are from the private sector, while the rest of the 20% contributions are from the governmental public sector, or the other way around with 80% of the contribution made by the public sector government, and 20% from the private sector businesses.

    History shows that private sector companies did not made 100% of the contributions, as the ultra libertarians and Republicans claim. One example is the Suez and Panama canal constructions. The private sector French company built the Suez canal, and then proceeded to building the Panama canal, and failing completely, because the Panama canal was a much more difficult and expensive project as compared to the Suez canal of digging through desert sand. The Panama canal involved blasting through a rocky mountain, digging though jungle, and insect infested swamp land, that killed off workers in droves from diseases, so that the private sector company ran out of funds and workers, and had to fold up. The US government lead by Theodore Roosevelt took over the Panama canal project, and using the vast funds provided by the vast US taxpayer base, and using the US government supported medical facilities to overcome the insect diseases, the public sector US government built the Panama canal.

    Since the Pareto Principle is based on statistical observations, it is necessary to use historical observations to determine the 80/20 split between private sector and public section contributions. A quick counting list may be the following.

    Private Sector: Suez Canal, Drake's first oil well, Offshore oil drilling, Fracking and horizontal-drilling oil wells, first airplane, railroad, steam engines, industrial revolution, cotton gin, early personal computers, whaling, cattle ranch, telegraph, telephone, electric light bulb and electric power plants, AC motor, steam powered boats, cellphone, etc.

    Public Sector: Panama Canal, Louisiana Purchase, Alaska Purchase, Copyright office, US Patent office, Airmail, first Hollerith data processing general purpose computer by US Census department, the Internet, World Wide Web software by CERN, radar, funding of first antibiotic penicillin mass production, DNA sequencing, iron clad ships, etc.

    On first look, whether there are any 80/20 split is not clear. It may take some values to be assigned to figure out the split.

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