Listen to Episode 26 on the United State’s new tax code
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In this episode Economist Daniel LaCalle and I analyze the new tax code in the United States. We discuss how simplifying the tax code will actually help bring capital back into the United States. The conversation includes repatriation, the state and local tax deduction, the interest deduction cap, and more. Be sure to tune in and check out our previous discussion on Bitcoin.
Brief Show Notes
You can find my profile interview with Daniel here.
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Tax Cuts and Jobs Act
“For me it’s absolutely essential. Is it ideal? No, I think that there are things that could have been improved.”
It was very important that this was implemented for three reasons. First, the demand-side policies of the Obama Administration were resulting in a disproportionate number of inversion deals, that is companies moving outside of the country. Second, capital expenditures was stalling. Third, real wages were way below the level they were in 2005-2006.
Overall Effect on Corporations
The tax code now makes the corporate tax rate much more competitive with economies around the world. The previous tax code made our economy quite uncompetitive with even the European Union.
Additionally, it reduces some of the deductions to allow small and medium enterprises (SMEs) to become more competitive with larger companies. The repatriation will help bring back around $2 trillion abroad.
Overall Effect on Individuals
The tax code cuts taxes for 90% of filers: the average household will save around $6,000 per year. Overall, it is what the US needed because the recovery gap was unacceptable at around $1.5 trillion.
Simplifying the Tax Code
It was impossible, under the previous tax code, for SMEs to navigate the different deductions they were able to take. The point to me is simplicity.
“I find it really funny that you see some billionaires saying they don’t want their taxes to be cut. Well, of course they don’t because they can hire lawyers to play around in the tax code without a problem.” ~ Daniel LaCalle
The bill does, reduces the gap between the effective tax rate of large multinational corporations and small and medium enterprises. Large companies will not be able to significantly reduce their effective tax rates.
Repatriation of $3 Trillion Abroad
“You had more incentive to invest in Asia, or in Latin America, or in the European Union, than to invest in the United States.” ~ Daniel LaCalle
This tax code attempts to revert the lack of capital expenditure in the United States. It was becoming too burdensome for companies to invest in the US. But now the $3 trillion held by large multinationals outside of the US can more easily be brought back.
There will be more economic activity, more jobs, and more investment in the United States economy. Ultimately, there will be much higher productivity and real wage growth.
Two problems have occurred in the last eight years: money velocity has collapsed and labor-participation rates have dropped to 1979 levels.
Money velocity has decreased because a massive amount of money is being created that does not get invested into the economy. The labor-force participation rate has dropped not just in one demographic, but in every single age bracket.
“Wages start to increase when productivity starts to increase. Productivity starts to increase when you start to put more high-added value capital into the economy.” ~ Daniel LaCalle
Interest Expense Deduction Cap
“You cannot have a system in which the tax code disincentivizes capital investment and job creation in the US Economy, while at the same time incentivizing leverage in the United States to hire people abroad.” ~ Daniel LaCalle
“There will always be a deficit if you don’t lower taxes. You increase taxes and then you spend more and more to stimulate the economy, getting into more debt. That’s not the way. You have to lower taxes.” ~ Daniel LaCalle
Every economist who criticized the tax bill for increasing the deficit simultaneously argued for increasing spending, which itself increases the deficit.
“You had Paul Krugman saying in an article, ‘It’s time to borrow,’ after a $10 trillion increase in debt. These people say, ‘I think a deficit is very good if the government spends the money. But a deficit is very bad if I give the citizens their own money.'” ~ Daniel LaCalle
The deficit must be reduced, but that will never happen if there is an incentive to borrow more and taxes remain the same. You cannot have an unfair and excessive tax code just because you have a high deficit and high debt. You need to look at the budget and start cutting non-essential items.
Entitlement Programs and Charity
The percent of giving in Europe is 43.3%, while in the US it is around 72%. While there may not be causation between higher taxes and lower rates of giving to charity it brings up an interesting conversation.
The United States must tackle the challenges of the tax code and its budget by taking a look at its own problems. First, it must look at how the budget subsidizes the militaries of the EU and the OECD.
Individual Benefits and Corporate Weaknesses
The best provisions, in Daniel’s opinion, are the increased deductions for families and the removal of the inefficient subsidies. This empowers families by giving them back more of their income.
On the corporate side, the bill is too timid in terms of the export reductions. The reduction in the tax bill to repatriate capital is good, but I would have been more aggressive. If, for example, they had implemented a tax rate that reduced progressively depending on the amount of money brought into the country.
“An economist is a very dangerous person when they match the liabilities of government with the savings of citizens, families, and corporations.” ~ Daniel LaCalle
State and Local Tax Deduction
The previous tax code subsidized states like California and New York with an unlimited deduction for SALT. California wants half of the tax cut to be given back to the state to compensate for the losses. This $10,000 cap will hopefully spur citizens of high-tax states to contact their state and local governments and ask for lower rates.
“The high taxation came as a revenue to the local government, while the deduction was against the federal government.” ~ Daniel LaCalle
The Expansion of the 35% Tax Bracket
The bracket expanded from a minimum income of $424,950 and a maximum income of $426,700, to a minimum of $200,000 to a maximum of $500,000. This move was made to adapt to changes in income ranges.
“Top managers went from being a middle manager to top management in a UK company, and they rejected a pay raise because they would end up paying more in taxes and their disposable income would be lower.” ~ Daniel LaCalle
There are two steps in someone’s professional life in which you cannot have a disincentive to improve. First, when you go from a low-skilled job to high-skilled job. Second, when you go from middle to top management.
Bills with Luke Scorziell does not provide investment, tax, or legal advice or recommendations. This material is solely intended for educational purposes based on publicly available information and may change at any time. Additionally, this article’s content is a summary of the Interviewee’s comments and, while rephrased by the Author, are not from the Author himself.
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About Luke Scorziell
Mr. Scorziell created The Edge of Ideas when he was 15 years old. After a few years of blogging he found a passion for podcasting and now regularly has guests on his show, Bills with Luke Scorziell. Find out more about Luke and his unique journey. Feel free to send Luke a message below.
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