Today in Trump: Tax Cuts and NAFTA

Both big-ticket news items out of the Trump administration today remain largely speculative in many ways, so it's too early to draw firm conclusions about them. That said, based on what I heard today, I want to offer a few points for consideration.

TAX CUTS:

It is no secret that our corporate tax code is grossly uncompetitive. It is among the most expensive on the entire planet and is structured such that it discourages investing, hiring, and other key facets of a healthy economy. It discourages entrepreneurialism, encourages companies to move their headquarters to other countries, and creates an incentive for American corporations to leave large amounts of their cash overseas--cash that could be brought home and put to work in our own economy.

This is what happens when you have a very archaic and outdated corporate tax system. When I say "outdated," I mean it literally: the U.S. is one of the last remaining developed countries with a world-wide tax system (meaning that money corporations earn around the world, not just the income they derive from the U.S., can be taxed here). Most of our peers got rid of world-wide tax systems decades ago.

I agree with Trump: 15% is a reasonable corporate income tax rate. (There are strong arguments to be made for its elimination entirely, but that's for a post another day.) This is the hallmark of his plan, and I like it. I need to point out two grave concerns I have though.

(1) It isn't clear that his plan will dramatically simplify the corporate tax code. Rates do need to come down, but that's far from the only problem. The code's complexity creates an additional tax in and of itself because complying with it is such an expensive legal and accounting endeavor. Any major reform must include simplifying and streamlining the tax code.

(2) Trump said that he doesn't care about revenue, and this plan seems to bear that out. This is a plan that, when combined with Trump's high levels of proposed spending, would add mightily to our national debt. Any tax and spending plans Republicans pass through Congress MUST seek to reign in our exploding national debt. You cannot increase spending while cutting tax rates and narrowing the tax base. The base should be broadened, the rates lowered, and the spending brought to heel.

There is a myth floating around the White House that cutting the corporate tax rate to 15% will lead to enough economic growth to offset tax revenue losses at current rates. That is not true. Cutting the corporate tax rate will lead to higher growth, but it will not lead to enough growth to stem the rising tide of national debt. (Corporate tax rates are but one of many headwinds our economy faces.) Any tax plan must be, at a minimum, revenue neutral and passed in conjunction with LOWER spending plans. Otherwise, you're essentially mortgaging your future for a little short-term relief. Additional government debt can quickly crowd out additional private investment, after all.

NAFTA:

Rumors are circulating that Trump may be planning to sign an executive order expressing our intent to leave NAFTA. This would be an error of historic proportions.

It is a good idea to occasionally revisit old agreements. Our economy and the world in general are very different places than they were when NAFTA was negotiated. We should never consider economic frameworks to be entirely permanent.

Thus, re-opening negotiations could be a very good idea. Re-negotiating and leaving are very, very different outcomes though. If we left NAFTA, three realities are absolutely certain to set in: (1) a small number of jobs would come back to the U.S.--far too few for most people even to know someone who held one of those new jobs; (2) far, far more jobs would simply be automated--no one would hold them; and (3) the prices that ALL Americans pay for many goods and some services would increase sharply.

It wouldn't end there though. This would be catastrophic for Mexico and Canada and near-catastrophic for the U.S. Stock markets would be hammered. GDP growth would slow--possibly even reverse (which means lower standards of living for many people). Anyone who has a 401(k), an IRA, or simply invests a little in the stock market to plan for retirement would find his retirement calculus suddenly looking less rosy.

The world is a different place today. Taking another look at NAFTA's terms is a good idea. As I said though, the world is a different place today, and whereas whether to join NAFTA was a good question in the 90's, two decades later, whether to leave it shouldn't even be up for discussion.

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