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Let’s Talk About Taxes and the Fed

At the risk of inflaming a sensitive political environment I am going to try to talk objectively about the economics of our political environment. I have my flame retardant suit on so let’s get started.

Jerome Powell is the new Fed Chief

Trump’s appointment of Jerome Powell is kind of strange in my view. Powell is totally status quo. He doesn’t have many beliefs that veer too far from the Yellen Fed. I suspect that Trump didn’t want to be associated with Yellen’s Liberal views and that Powell is somewhat more likely to be amenable to Trump’s deregulation agenda. But the big story here is that nothing much is going to change at the Fed. And maybe that’s Trump’s most important message here. While he disassociates himself with the Liberal Yellen he also doesn’t disturb what the Fed is doing. And that’s probably a good thing in Trump’s view as the stock market is one of the definitive positives that Trump has going for him right now. So, long story short – this is a non-story in my view.

The Cut, Cut, Cut Act. 

A new tax plan is out and it’s called the “Tax Cuts and Jobs Act”. I much preferred the name that Trump wanted to use – “The Cut, Cut Cut, Act”. I think we could all use a little humor in our politics these days and that name would have been just the thing to provide us all with a good laugh.¹

In all seriousness though – this bill isn’t as bad as some expected it to be. There were rumors about some seriously stupid things like a low cap on 401K contributions and things like that. But the actual bill has turned out to be pretty benign as far as Republican tax bills go. Here are the big ticket items:

  • Consolidates and simplifies the current 7 brackets into 4 with rates of 12%, 25%, 35% and 39.6%.
  • Corporate tax rates fall to 20% while the max rate on pass through entities (mostly small businesses) is 25%.
  • The AMT and estate tax are repealed or phased out.

This is a pretty good overall summary from the Tax Foundation.

Last year on election night I said this:

I think that’s holding up pretty well and this all looks consistent with that general view. This is a pro-growth plan since it’s favorable to private investment and will also boost the deficit at a time when we still need large deficits. It’s also an inequality boosting plan as the cuts will benefit the wealthy more than the middle class. This is generally true of corporate tax cuts as the research has shown.³ So again, it’s kind of more of the status quo as far as the last 30 years have gone. I suspect Conservatives will make this out to be better than it really is and Liberals will make it out to be worse than it really is. Those of us in the middle will just sort of shrug and move on and in the end I suspect that the muddle through economy just continues to muddle along because all of this is more status quo policy.

¹ – You can read the whole tax bill here, but it’s about as fun as sticking your head in a garbage compactor.²

² – I have no experience sticking my head in a garbage compactor, but I suspect it would not be fun.   

³ – See “Who benefits from corporate tax cuts? Evidence from local US labour markets