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Monday, April 10, 2017

The Daily Combover - April 10, 2017

With the SwampCare debacle behind him, and riding high off an invisible polling boost from a bizarre attack in Syria where he warned the opposition hours before the attack, Trump is moving onto bigger things. Today he unveiled details about his tax plan which appears to worry just about everyone who is interested in it.

Let's take a look. Back in February Trump promised us the greatest tax plan in the history of the world. But March came and went and there was barely a whisper about it. Now it appears he's completely scrapped that plan for one that is betterer.

Here are some rumors:
1. The BAT is dead. In its place is rumored to be a VAT. Let's review each of these.

The BAT, or Border Adjustment Tax involves placing a 20% tariff on all imported goods and then using half of that revenue as federal income and the other half as a rebate on exported goods.  While in a vacuum that would boost Net Exports (X-M), the world doesn't exist in a vacuum.  If we impose a heavy tariff on foreign goods, those countries will impose punishing tariffs on our exports as well. The net result will likely be less trade overall with a side impact of higher prices globally -- upwards inflationary pressure.  That would force the Federal Reserve to act, raising interest rates, and the US economy would move into a recession shortly thereafter.

The VAT, or Value Added Tax, is effectively a tax on consumption. Most wealthy countries have it. And some, like Canada, use it specifically to fund universal healthcare.  So what exactly is it? Think of it as a National Sales Tax.  We've heard this story before. Mike Huckabee pushed it in his Presidential campaigns as a FairTax. Basically, Huckabee's version was a flat 30% sales tax on all consumable goods that replaced the income tax.  Remember when I said that most wealthy countries have it? That's because those countries all have very strong social safety nets including very generous food, housing, and unemployment subsidy provisions.  Trump, on the other hand, is rumored to be considering adopting a slightly smaller VAT and using its revenues to offset the payroll taxes which fund Social Security. The problem is that this effectively comingles the funds. Right now, Social Security is funded through a trust fund that is made up of the payroll taxes collected: Roughly 12.4% of income up to a little over $100,000 per worker. That 12.4% is paid evenly between employers and employees. The average American worker pays around $3000 in payroll taxes a year (you'll see a FICA deduction on your paystub or if you are self employed, you'll be paying something called SECA). You can probably guess who doesn't want to be paying that any more -- the employers who get nothing direct out of their share of the tax burden. But eliminating FICA and cutting corporate tax rates to make this revenue neutral also means that the Social Security Trust Fund will be underfunded even if consumption does not change (most research shows that a high sales tax has a significant downward impact on sales). For more, see an earlier post of mine here,

2. Since the only economist that Trump listens to is a quack named Stephen Moore who is widely considered the worst economist on the world, one can presume the other major inclusion is Moore's favorite -- a massive cut to the corporate tax rate. Despite Moore's claims, we've never seen any evidence of the Laffer Curve being real. Corporate tax cuts hurt the economy by triggering austerity cuts because they typically push government budgets into the red.

In the end, do you really want to trust this guy on taxes when he's admitted to not paying federal taxes for at least 18 years?
Our Tax-Expert-in-Chief
Catch you on the flip side.

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