Have you seen Disney’s “Prep and Landing” children’s Christmas specials? They are worth the watch. The premise is that Santa is assisted with his Christmas Eve duties by an elite team of elves who prepare each house for the big man’s arrival. Naughty children, however, are visited by another group of elves, the Coal Brigade. They get coal in the stocking with a note which says, “Try harder next year.”
So what about us? Did we just get coal in our stocking or is that a diamond? Tax reform is finally here and the Republicans have their victory, but what does that mean for us? It means that the vast majority of Americans will pay less in taxes. Beyond that, no one really knows and anyone who says they do is selling something.
I have a Bachelor of Arts degree in Economics from Wake Forest University, and maybe I am just getting more nostalgic as I age, but I miss the days when economics was more of an art and less of a science. Here is what we actually know about taxes and economic activity: We know that when you tax the private sector – individuals and companies – you take money away from the productive force in our economy and give it to the government. Government is necessary, and there are many legitimate roles of government, but government does not create productivity and growth. Government takes what is already there and redistributes it.
I hear the naysayers now, “What do you mean government does not create productivity? They build roads, etc.” This is true; providing a community-wide infrastructure is an important and legitimate role of government. But, government does not create the need for the road. We need roads because we live here and work there. It is our activity that creates the need for infrastructure and since it is a shared need, it is best fulfilled cooperatively through democratic government. It doesn’t have to be that way; as anyone who has ever been stuck in traffic in Atlanta knows, not all city streets are planned. The horses decided where the infamous Peachtree Street would meander, as they traveled the safest route along the ridge. If any visitors to Atlanta doubt Peachtree is actually a ridge I would encourage you to get out of your hotel and take a jog. (While I am on the subject, of course you can drive in the snow in Chicago; Chicago is flat and the streets are in a grid…)
I digress. It is often useful to think of the economy as a pie. One can slice it up many ways, but for our illustration we have just two slices, the private sector and the government. All growth comes from the private sector, so the bigger it is relative to the government, the more economic growth we have. Government is necessary and can only be funded by taxation. The ideal tax system is one with low rates and no loopholes. That is unfortunately politically impossible. This current reform does, however, move us in that direction, and is therefore a good thing on the whole.
I don’t expect Democrats to admit that, because it is a Republican bill. Even though corporate tax reform was on the Obama agenda. This, in theory, is something everyone agrees on, but the Republicans refused to give Obama a “victory” when he was in office, and now the Democrats refuse to go along. It is disappointing, but unfortunately not surprising. This is the state of our politics. Nothing is about policy anymore; it is all about us vs. them. We have unfortunately come to expect that from our politicians.
The sad thing is that we now seem to have this same dynamic within our supposedly non-partisan policy experts. Facts are cherry-picked to fit the pre-determined narrative, and projections that serve that narrative suddenly become fact. Projections are not fact. In fact, the only thing one can be certain of when projecting the future is that the projection will not be accurate. It might come close, but that is the best any fortune-teller can hope.
Will this tax bill add to deficits in the long-term? That depends. This bill will stimulate growth, this is certain; the unknowable question is, how much growth? The naysayers think it will add only a little to the economy and therefore it will be a net loss in tax revenue. The proponents say there will be substantial gains, and therefore the cuts will pay for themselves. The truth? Only time, not politicians or pundits, will tell.
In the meantime, enjoy a little bit more of your money, and have a very Merry Christmas!
Chuck Osborne, CFA