- 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 to undergraduate education
throughout New York City.
Each year our doctoral students teach more then 200,000
of our own undergraduates,
bringing the resources of our Graduate Center
from our seminar rooms into every neighborhood
in this city.
We're also a place for public conversation.
We host a large number of public programs,
lectures and events, such as tonight's,
and I encourage all of you,
both here in the audience 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)
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