Friday, April 28, 2017

The TV Personality Behind the Big Government Tax Proposal That the Trump Administration Announced on Wednesday

The thin on details tax proposal announced on Wednesday by Treasury Secretay Steve Mnuchin and  Director of the National Economic Council Gary Cohn appears to have been spurred on by CNBC commentator Larry Kudlow and his Krew.

Here's The Washington Post with the details (don't for a minute ignore the fact that Arthur Laffer's name is in the mix):

[I]t was an April 19 op-ed in the New York Times, titled “Why Are Republicans Making Tax Reform So Hard?” and penned by Steve Forbes, Larry Kudlow, Arthur Laffer and Stephen Moore, that helped propel Trump to act.

The op-ed, written by conservatives who have strong influence within the White House, said an overhaul of the tax code would give Trump a much-needed “legislative victory” and complained that the White House “seems to be all over the map on the subject.” It called on the administration to move quickly on a tax proposal, not to overthink it and to push forward “with some degree of urgency.”

Trump saw the op-ed right as he was becoming restless with the success of his economic agenda.

The White House rushed to engage the op-ed’s authors and reassure the economic conservatives who have privately complained about Trump’s nationalistic streak on trade and the lack of action of taxes.

When Kudlow and Moore gathered a group of conservatives Tuesday evening at Cafe Berlin, a white-tablecloth German restaurant on Capitol Hill, Treasury Secretary Steven Mnuchin stopped by, even though he was not scheduled to attend.

“We texted him and said, ‘Come by if you’d like,’ ” Kudlow said. “Well, he did, and he spoke for two or three minutes and took questions.”

“Everyone looked around and said, ‘This is the Steve we knew during the campaign,’ ” Kudlow added, referring to Mnuchin’s enthusiasm for sweeping tax cuts.

On April 21, two days after the op-ed ran, Trump announced in an interview with the Associated Press that his advisers would be releasing a tax plan by the following Wednesday, or “shortly thereafter.”

Some aides working on the plan were stunned, caught unaware of the expedited timeline.

Still, they reasoned, maybe “shortly thereafter” meant they could unveil the plan a week or two later. But hours after the AP interview, during an appearance at the Treasury Department, Trump stood beside Mnuchin and told reporters that the tax plan would come out Wednesday.

The proposal unveiled that day offered some specifics — cutting the corporate tax rate to 15 percent and collapsing seven tax brackets down into three — but was vague in other areas, including just how the government would pay for it. Critics seized on the one-page printout the White House distributed Wednesday with details of the tax plan as the flimsy embodiment of its lack of depth.

“It was a restatement of bullet points that Larry Kudlow and Stephen Moore drafted on the back of a cocktail napkin at the 21 Club,” quipped one longtime Washington Republican in contact with the White House.
It's Kudlow and His Krew in their op-ed that pushed the administration away from focusing on revenue neutrality and to move toward an expansion of the budget deficit:
First, President Trump and Paul Ryan, the speaker of the House, should stop insisting on “revenue neutrality.” In the short term, the bill will add to the deficit. But President Trump’s tax bill, like those of Presidents Ronald Reagan and John Kennedy, should be a tax cut, and it should be sold to the American people as such.
There are some who argue that an increase in the budget deficit is a better way to fund a tax cut rather than via revenue neutrality. But it is really about who you hurt and who you ease the pain for when you don't cut government spending.

With a tax cut financed by a deficit, it might help a high-income physician who will have a lower tax rate but it would hurt, say, a retiree on a fixed income who would not be protected from the accelerating price inflation that would likely accompany an expanding budget deficit.

In other words, neither an expanding budget deficit nor revenue neutral tax reform are positives. What needs to be done, and which Trump and the Kudlow Krew are not focusing on is dramatic shrinkage of government spending, The money needs to be in the private sector.

The Kudlow Krew will claim, in faulty Keynesian fashion, that the budget deficit will result in a growing economy that will ultimately result in expanded tax revenue resulting in a reversal of the deficit and a tax cut that "pays for itself."

This is, of course, Laffer curve theory.

Murray Rothbard exposed the faulty theory long ago:
[T]he so-called "Laffer curve," set forth by California economist Arthur Laffer... advanced as a means of allowing politicians to square the circle; to come out for tax cuts, keeping spending at the current level, and balance the budget all at the same time. In that way, the public would enjoy its tax cut, be happy at the balanced budget, and still receive the same level of subsidies from the government.

It is true that if tax rates are 99%, and they are cut to 95%, tax revenue will go up. But there is no reason to assume such simple connections at any other time. In fact, this relationship works much better for a local excise tax than for a national income tax. A few years ago, the government of the District of Columbia decided to procure some revenue by sharply raising the District’s gasoline tax. But, then, drivers could simply nip over the border to Virginia or Maryland and fill up at a much cheaper price. D.C. gasoline tax revenues fell, and much to the chagrin and confusion of D.C. bureaucrats, they had to repeal the tax.

But this is not likely to happen with the income tax. People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut.

There are some other problems with the Laffer curve. The amount of time it is supposed to take for the Laffer effect to work is never specified. But still more important: Laffer assumes that what all of us want is to maximize tax revenue to the government. If – a big if – we are really at the upper half of the Laffer Curve, we should then all want to set tax rates at that "optimum" point. But why? Why should it be the objective of every one of us to maximize government revenue? To push to the maximum, in short, the share of private product that gets siphoned off to the activities of government? I should think we would be more interested in minimizing government revenue by pushing tax rates far, far below whatever the Laffer Optimum might happen to be.
In short, the Laffer curve is a cover story that justifies "short-term" government deficit spending for supposed long-term growth and an alleged long-term balanced budget. But as should be clear, a government deficit relates to government spending, Government spending never boosts the real economy it simply distorts the economy putting money into the government bureaucratic machine.

Further, the added government borrowing, that is the essence of a growing budget deficit, crowds out private sector borrowing that could actually be used to benefit the economy.

The takeaway: If there is no shrinkage in government spending, in some fashion the government is pulling the funds out of the productive private sector. Not good.


(Sources; Washington Post, New York Times)


  1. In defense of Laffer, setting aside all the bad incentives the curve allows, it sorta kinda works. Of course, this is academic, as the politicos will use it for the usual bullshit, but there is SOME logic to the concept.
    It's when it gets tangled up in the SPENDING side that things fall apart. Regardless, ANY money retained by the private sector will lead to growth, which COULD increase taxable income.

  2. I always thought the main impact of Laffer's theory was with respect to capital gains tax, not income tax. I agree with Rothbard that people are not likely to stop working or work more for small changes in ordinary income tax rates.

    With respect to capital gains, on the way in, people are more likely to invest if they expect that the taxes on the way out are likely to be lower, since this increases their expected after-tax returns (of course that also involves forecasting the political winds a few years out).

    On the way out, within a certain band people can time their exits, and if they expect tax rates to be lower they may hold in expectation and then sell when they are lowered, or if they expect them to rise they may sell now (this was one of the reasons for the increased activity before the "fiscal cliff" a few years ago). But this is just pushing out or pulling forward activity, and thus tax receipts, which would have occurred anyway.

    However, capital gains taxes are a small component of federal revenues, so the Laffer theory seems much ado about very little.