Authored by Tom Luongo,
The first rule of politics is feather your own nest. President Trump’s tax cut proposal always had this in mind.
Congress has passed a bill which tinkers at the edges but leaves most of Trump’s core proposal intact. It’s obvious to me that Trump has the political acumen of another brilliant U.S. politician, the loathsome Franklin Delano Roosevelt.
Yeah, I’m not a fan of FDR. But I do respect his political skill in the same way I respect the way sharks hunt their prey.
FDR repackaged Herbert Hoover’s Works Progress Administration as “The New Deal” which set him on a course of near perpetual re-election thanks to the wealth redistribution it engendered.
Am I saying the New Deal was nothing more than a vote-buying scheme? Yeah, pretty much. FDR knew that politicizing the Supreme Court and pushing the New Deal, even if he did it for the right reasons, would reshape the Federal election landscape for generations.
Trump’s tax plan will have similar effects. And it’s why there was such staunch opposition to it in Congress.
Democratic leadership understand that the triple-whammy of eliminating the State and Local Tax exemption, lowering corporate tax rate to 20% and incentivizing the on-shoring of corporate profits held overseas will gut their support at the electoral college level.
Why?
Mr. Trump, Tear Down that Blue Wall!
The incentives are now aligned to accelerate the exodus of workers and businesses from high tax, high-regulation states like New York, New Jersey, Illinois and California to low-tax, lower regulation states like Florida, Georgia, Tennessee and Texas.
In other words the Blue Wall will crumble.
The bill is not 48 hours old and already the mainstream media is trying to tell us how horrible this is. From CBS News via MSN.com comes a four-way case study of taxpayers under the new law, in three of their four case studies taxes drop significantly. In one they try and scare old people about how their health insurance costs will rise.
But, in gutting Obamacare, everyone’s health care costs are going to fall, so….
In that one case, John and Maya their “Married Couple with Two Kids” become the “Married Couple with One Kid from New Jersey,” does the taxpayer get the shaft.
The whole article is a mess of gamesmanship. A married couple with 1 kid making a combined $71,000 should not be living in a $600,000 house!
In New Jersey!
Putting 10% of their income into their 401k!
Do they eat dirt?
That version of John and Maya doesn’t exist. And if they do, they shouldn’t. And the tax code should not be gamed to allow them to do so, because then it’s a tax subsidy from the self-employed to the fake middle class.
In fact, another benefit of this tax code will be the bursting of over-priced middle class real estate in high-tax states as John and Maya face financial reality.
In software parlance, that’s not a bug, it’s a feature. It’s called political retribution.
In the current market John and Maya are better off selling their house, taking the equity, buying a nice house in a secondary market in Florida or Alabama and living mortgage free or nearly so while building new careers locally.
They could practically live on the child and EIC while working at Home Depot, thanks to 1) the increased exemptions for lower-income workers and 2) local construction will be booming.
Bringing Home the Bacon
Turning to the onshoring of corporate profits. All of that capital returning from overseas to invest in infrastructure and production won’t go to the big ‘Blue Wall’ states like New Jersey but to the new production belt in places like Chattanooga.
That’s where the jobs will be and that’s where the people will gravitate. Moreover, the effect I just described for John and Maya will become an epidemic in places like L.A. (where Hollywood will be getting smaller) and Seattle (software development is moving towards blockchain).
These people will see their overall tax bill rise unless they make the rational choice to sell their over-valued property to some European or Chinese ‘investor’ looking to flee economic chaos locally, pocket the profit and cut their tax bill in half.
Congress’ Joint Commission on Taxes severely low-balled the amount of capital U.S. firms will repatriate. According to this article by Larry Kudlow (not normally someone I would quote, but here he’s rational), the JCT estimated just $500 billion out of $3 trillion in offshore corporate profits will come home over 3 years.
And then they said 1-2% growth, which, with a tax structure like this, is a low ball. The JCT’s own rate of estimated repatriation ($280 billion in 2018) alone would add more than 1% to GDP as corporate savings is added to Gross National Spending. So, spare me the class-warfare histrionics.
This is mainly how they came to conclude the tax bill would cost us $1.4 trillion over ten years. That’s $140 billion a year. Surely, 1) we can cut spending by that much and 2) we waste ten times that in off-budget wars and subsidies every year.
There’s plenty of room to cover the ‘costs’ of this tax cut.
The FOMO Trade
The tax bill itself will make the U.S. more competitive than the sclerotic social welfare states in Europe and Japan. Capital flight into U.S. real estate as a safe-haven play will keep demand up as Americans migrate away from the taxes and Europeans and Asians flee currency devaluation and bursting debt bubbles.
The old tax system was designed to make us competitive with Europe. In other words, normalizing our tax system with theirs while we still pay for their defense, the U.N. and bear the burden of the world’s reserve currency and all the issues of Triffin’s paradox that entails.
In short, the tax code was designed to redistribute America’s wealth around the world in pure Marxist style. Raise our costs instead of forcing them to lower theirs.
In fact, this tax bill will only accelerate those processes already underway. The Dow is making new highs while the German DAX is struggling.
That fire under the Dow Jones and the cryptocurrency markets is only just beginning as the middle class is freed from the yoke of Obamacare to begin taking part in the current runaway bull markets.
This year’s tax refunds will fuel a whole lotta FOMO, folks.
A Good Start
The tax cut bill moving through Congress now is by no means perfect. Eliminating income taxes is the ideal. But, that’s not possible so in evaluating it I’m looking for whether it solves the big problem, namely the incentives to push capital out of the U.S.
It does this.
Lowering the corporate tax rate alone is a major win for Trump. Yes, personal tax rates need to go down. Yes, a lot more work needs to be done for small entrepreneurs and the self-employed who are still massively disadvantaged by the code. But, this bill is a major step in the right direction of reversing the flow of real wealth and incentivizing it to stay onshore.
Don’t let the Michael Moore’s of the world influence you one whit. That man has nine houses and is a multi-millionaire. He’s also a fat, stupid hypocrite and an economic ignoramus. Fix the business environment first. Invite capital back onshore. Get U.S. corporates spending at home.
Meanwhile Ted Cruz, Rand Paul and the incoming freshman class of MAGA guys can amend this bill to make it even better for the middle class. In Hollywood terms, they can fix this in post-production.
The cuts that Trump has ordered to the cabinet departments will begin having the biggest impact in the second half of his term.
The capital flight I just described will add to the mix, and for a short time, the U.S. will likely see an economic boom it hasn’t seen since the days of Volcker, Stockman and Reagan. And that, my friends, is what the Democrats truly fear, a 2020 election that puts Kamala Harris into the role of Walter Mondale.
FDR would be proud.