The Big Tax Hike Coming in Just Over a Year

26:10We try to use the government data as much as possible, you know, and we supplement it with lots of other studies and different groups. Those are all very helpful, but we tend to rely on, so what do the numbers show us. And yes, there are always other factors. I think the relief on regulation played a pretty important part, I think, in the economy overall. And you just have the economy in general. So we were always taking a look at how much did it grow jobs, how much money returned from overseas, two and a half trillion. We had innovations to do your intellectual property in America. We're bringing it back.

26:48Those revenues doubled, really good outcome there. investment from businesses big thing that drives that drives equipment that drives all this stuff on average went up 20 percent really good numbers uh research did the exact same thing and so watching the economic data we were achieving much of what we uh uh had hoped for the one the one element 2019 to me was the most fascinating year we watched it closely because the code had been in place one year. Now we could sort of see how it was working. And we know generally how an individual, like a corporate rate cut or research and develop, how it will perform generally.

27:31But the question is, how does it all interact? You know what I mean? Like how does that, it's like a Formula One car. You bring an upgrade, how does it affect the rest of the performance? And so that's what I was following. 2019, a couple of key things happened, I think, besides very strong economic growth. One, real wages, I mean, ahead of inflation, grew more in one year than in the eight years combined before it. In fact, those first three years after TCJA, real wages averaged 9%. That's the best three years on record. So paychecks were growing. Check the box. That was working really well. Poverty, you know, 2019 just plummeted in a good way.

28:11But it made the most progress among the people who'd sort of been left behind, people of color, those without a high school degree, disabled, young folks, got new opportunities. That was what we were driving for. And then income inequality began to shrink for the first time in 50 years, according to Larry Lindsey, Fed governor and in the White House economic team, another goal of ours. And so, yeah, we were every year tracking what progress we're making and what provisions might not be performing as well as you want. You mentioned income inequality. I'm curious your philosophy about the role of progressivity in the tax cuts.

28:53We obviously have a progressive income tax, and the more you make, the higher percentage of your marginal – higher marginal tax goes up. A criticism that you get of tax cuts is like, well, a lot of the tax cuts benefit the rich. But, of course, the rich pay a lot of taxes. So if you're relative to the poor, so if you're going to cut taxes, we all know like on net where those dollars are going to flow. But just talk to us about your philosophy of the role that the tax code can play in the TCGA or just generally and thinking about the importance or unimportance, if that's your view, of progressivity in the tax code.

29:26Yeah. So I don't think people realize how progressive our code is compared to other countries. If you just look at like what is the top rate, you might say, well, it's more in France or somewhere else. But if you look at what's the share of taxes that each income group pays, we are incredibly progressive. And the top 1 % in America today shoulder about 45 % of all the income tax burden. That's unusually high for it. And the converse is true as well. like the bottom half of income earners, what we would think is up to the middle class, shoulder only about a little more than 2 % of the whole income tax burden.

30:07And it grew after the tax reform. It grew a quarter for the wealthy. They picked up a bigger burden. It shrunk by a quarter for the modest and low income, down to 2.3%. So people are always surprised how progressive we are compared to other countries. Real quickly, and before we forget to do this, can you give us the bullet point summary of what happened? Okay, let's say 2024 election happens. It's political gridlock. They can agree on nothing in D.C. What reverts and what doesn't? Yeah, so 2017 was all about growth and competitiveness. 2025 is going to be about the individual tax cuts. Do they hang around?

30:49And so all the individual marginal rates revert back to pre-2017. Those are an average family for, it's going to be around$2 ,000 roughly. Things like the child tax credit is going to shrink back. The standard deduction, which we nearly doubled, hugely popular. And now 90 % of Americans don't have to itemize their taxes. They sort of love that. That reverts as well. The small business tax cuts we created goes away. That's really damaging, I think, in a big way. Then things like the estate tax, what we call the death tax. Family, farms, and businesses goes back to very few exceptions and a much higher rate.

31:29Things like opportunity zones disappear. We created a new tax credit for paid family and medical leave. So businesses that created those programs tailored to their workers could get some help doing it. It goes away as well. And in some business credits, really important research and development expensing, expensing of your equipment, software, all of that reverts to a very, I think, negative position there. So, yeah,$4 trillion or more of tax hikes that'll slam the economy. Neither party, I think, has anything to win by letting these expire, which is why you asked why something's expiring sometimes.

32:17So I'm not going to just blame it on Senate budget rules, but I'm going to blame it on Senate budget rules because that's what did it. But our thinking was we locked in all the growth competitiveness because it's so important on paychecks and jobs. We left the more bipartisan issues. We believed Republicans and Democrats would want to keep the middle class tax cuts, the small business tax cuts, the child tax credit, issues like that, where I think there'll be more common ground heading into 2025.

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34:26Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at Public.com. I want to go back to the inequality discussion because I take the point about progressivism and the idea that the wealthy in America are paying more taxes overall. But my impression is the more redistributionist countries that are out there, I guess, they don't necessarily have really progressive taxes. But the difference is that the tax that they get, they direct more towards the poor.

35:06So I guess my question is, could we reduce inequality through something other than taxation? Could we just spend in a different way in order to - More focused way. Yeah, exactly. You know, perhaps, but we have a pretty poor track record of that. Unfortunately, within our spending in the government, so that social safety net, I think we're all really cognizant of, we often discourage work in connecting back to the workforce in a lot of those. When you put all that net together, on average, in a state like Texas, for that family, whether it's single mom or with a couple children, those benefits start to add up.

35:55Like in Texas, we're a little stingy on all that. It's still close to$50 ,000 a year. In Pennsylvania, it'll be 60-some thousand. So the problem is that you make it really hard for people to move off out of the social safety net. It's not in their interest to do it or it doesn't feel that way for them. And so part of our thinking, again, on the tax code was let's reward work, you know what I mean, in a way that allows them and encourages them to move back into the workforce. That happened in TCJA, certainly not to the level we will need for the long term. And COVID changed everything sort of on labor participation and just changed the game that way.

36:42One of the criticisms of the current tax code is people talk about this phenomenon of buy, borrow, die. Wealthy people accumulate assets. Rather than sell them when they go up to enjoy the fruits of their increased wealth, They borrow against them and that borrowing is tax-free and then they spend that and then assets tend to go up like stocks over time. And then they die and then they're bequeathed to their children and the children get a step up in basis such that they don't actually pay capital gains on the original purchase of the real estate or the stock or whatever. And so one thing that was for about a week people were talking about it was like, well, maybe we should have some sort of a tax on unrealized capital gains.

37:29seems very unlikely to me for all kinds of reasons. But setting that aside, are there still issues out there that seem structurally wrong, such as step up in basis and some of these other ways that the wealthy can accumulate assets without having a big tax bill before realizing their benefit? Yeah. I actually don't see that as an abuse in the sense that we do that in our home equity loans you know i mean we build up we build up that value we borrow against for something that's important the value hopefully keeps going up and and when we pass on you know we do get an exemption and usually for us for middle class yeah you know they don't get hammered with the estate tax in any way so i i don't know what's wrong with borrowing against values you've invested in.

38:20And I'll tell you this too, most of those investments come, I think, because our tax code, we try to drive investments. So when you earn a dollar, there's three things you can do with it. You can spend it, which a lot of us do. You can save, which is economically better, or you can invest. That's risky. No guarantee you're getting it, but is the most pro-growth of everything you do with that dollar. And a lot of, we're trying to encourage people of every income level to invest more, save more and invest more, because usually it's good for them and super for the economy. And one of my concerns always is when you go after unrealized gains or tax hikes on the wealthy, you're actually taking those who are the super investors, you know what I mean, and our country are willing to risk everything to take us to Mars or, in some cutting-edge technology that drives jobs and opportunity in such a big way.

39:21So I'm always really cautious about just picking that group of villains, saying, you know, we need more of your fair shares, how much money you owe me. Yeah, I think economically. And for the U.S., it's really the innovation and the investment. Our tax code's pretty good at this, at driving that risk. So speaking of criticisms, we would be very remiss if we didn't ask you about one of the biggest ones, which is the impact of the tax cuts on the deficit. And I know there are all these different ways to measure this, but I think, you know, one fact that probably can't be debated is that under Trump, there was like$8 trillion of debt approved versus under Biden, I think there was something like$4 trillion.

40:09And I'm curious how you link those two things together. So the cuts and the deficit. And I guess, Joe, don't come at me, but are Republicans MMTers now? Do deficits matter? Yeah, they definitely do. So sort of reset some things. Look, I think Biden's debt was much higher. It's been averaging$2 trillion a year there. And certainly there was an impact from TCJ, but not nearly as much as people think. And here's why. Everyone is shocked when I tell them that we paid for most of the tax cuts up front. We didn't do a trillion and a half dollars of tax cuts. We did five and a half trillion dollars because we needed to be that bold to get back in the game and drive the economy.

40:57We raised four trillion dollars through reforms that paid for growth and for lower rate. And so on the day President Trump signed it, 72 % of those tax cuts were already paid for. On top of that, we've seen huge revenue growth. For example, corporations now pay more to the government at the lower 21 % rate than was projected at 35%. I mean, growth really matters, drives a lot of revenue. So I think that$1.5 trillion, the Congressional Budget Office quickly revised it down to about$1.1. We've seen more growth since. And unlike most tax cuts, you can safely say for most tax cuts, you can recover about 30 % of it.

41:40Generally, that's the rule of thumb. In this case, we recovered twice that to begin with. It's gone much higher. It did create deficits, no question about it. But I think much smaller than most people ever dreamed we would do. Going forward, though, Congress is going to have to raise$4 trillion just to keep the current tax cuts. On the Republican side, this is going to be a real issue. Debt and deficits matter. It's exploded in a big way. And so I think, especially if Republicans run the table, who knows how this works in November, I think there's going to be, especially in the House, some real serious discussions about how much of these extensions are paid for.

42:24You know what I mean? What do we do? What kind of other reforms do we do, either in spending or the tax code itself, to lower that number? So no, I don't see us now moving to monetary theory, no matter what's said. I think that's the biggest issue that worry most Republicans. I just have one last question. And you talked a little bit about this, where some of the goals you had in the beginning were related to international revenues and how they were taxed. And there are still some certain sectors of the economy, highly intellectual property-oriented sectors like pharmaceuticals, maybe like something also still, you know, iPhones, etc.

43:06But pharmaceuticals, there's this sense of unfairness that Americans pay some of the highest prices in the world for drugs. And at the same time, many American drug companies seem to pay fairly small amount of taxes with a lot of the revenue booked overseas. Is there still more work to be done? Let's say you had another crack at it and somehow the stars aligned. Is there still more work to be done, in your view, on getting that right? I think, let me just say this, tax reform was not perfect. Yeah, sure. We went through the political process. On the day it was signed, I had a thousand things I wanted to do differently.

43:42And my advice to Congress now is don't just extend these, improve them. There's always room to do that. I think we went into the international with how do we become super competitive, But also, how do you prevent companies from exporting their income to lower tax countries? How do you prevent them from importing their deductions to lower their rates? It's complicated and probably more complicated than needed. We generally achieve that. Can you do more in that regard? I think we can. But the outcome we noticed was, one, it was much harder for companies to do it. Two, multinationals now are investing so much more in America than overseas.

44:27That's good. Yeah, we always ought to look at how we improve the international side of this. Is there room for more multilateralism when it comes to global tax regimes? Could you perhaps coordinate so that it's not a race to the bottom? You know, I really disagree with that, with the philosophy. Secretary Yellen, who I respect a great deal, I got to work with her when I was head of the Joint Economic Committee, feel strongly about that approach. It seemed to me the last three years America has really been trying to coerce our allies into making sure no one can have competitive rates vis-a-vis each other.

45:09I think that's a mistake. I actually think the race ought to be to more growth, better paychecks, more competitiveness that way. And so, yeah, I think these international sort of cabals on tax are often a mistake. But if you're going to do it, here's a lesson from the last couple of years. If you're going to do international tax treaties and agreements, you've got to take both parties along with you because you want the agreement to stick, right? You want to have the buy-in from both parties. In the past, that was the case, not so much the current administration, which is a shame because I think had both, and even Democrats will say, look, there hasn't been a lot of conversation.

45:51To do international, take the time to keep your folks with you. I don't care, Republican or Democrat, in those conversations because you're going to end up with a better product and it'll stick. All right. This is my last question, but it feels like no matter what happens in November, we are all going to have to familiarize ourselves with the reconciliation process. Oh, yeah. Can you tell us what should we know about that? What's the most important thing to remember? So, Tracy, you had to go there. Reconciliation. Very triggering. I just slipped it in right at the house. Yeah, let me get this.

46:27Let me show you the scars on my back. So, you know, reconciliation is a budget process. Both parties use them usually for very important things. They're limited, basically spending and tax issues, tax growth issues. Lots of complex rules. But the bottom line is a reconciliation budget, if approved by the House and the Senate, goes to the president, allows that bill to pass with the simple majority in the Senate, but with a lot of rules to go with it. So reconciliation happens first. So Congress has to agree on what the parameters are for tax reform or health care in the Affordable Care Act or in the Build Back Better or the Inflation Reduction Act.

47:17So that's the first step. It's not easy to do it if either. But here's the tip off. if either party runs the table, reconciliation will show us what they're going to do in taxes or spending. You know what I mean? It will show you right up front what the guardrails are around this. If there is divided government, which most people think there will be in one way or the other, you won't have that. And so you'll sort of glean all that at the end of the process. So reconciliation is a runway that you land these major bills on. The House version will invariably look different than the Senate version because of these very difficult budget rules.

48:04The reason for years Republicans wrote tax reform to be revenue neutral was that we could get permanence there, which to me, the best tax code is a permanent tax, at least as much as you can get with the political environment that will change these. That's where you get the most growth, most certainty, the better outcomes, which is why it's been frustrating to end reconciliation. We didn't get all of this permanent for the long term, but it is what it is. And it's really an arcane process, but a really vital one. Kevin Brady, thank you so much for coming on OddLoss. That was really fun and very informative.

48:48Well, thanks for having me, and thanks for really good questions on a complex issue. Tracy, thanks. Thank you so much. I stirred up the memories. At least you didn't start with that. Yeah.

49:12Tracy, I found that to be very interesting. I really liked hearing, just like even from a process standpoint or a philosophy standpoint of what reform of the tax code is, what reform of the tax code is within the constraints of the U.S. legislative process, I found that to be a very informative episode. It was really interesting. One thing I'll say is it very much reminded me of a conversation I had in a bar once. That's a good sign, I think, for any episode. Well, with a policymaker, and I won't say who, but he was talking about how there's this tendency to think of, there's an idea floating around that the U.S.

49:49doesn't have a very strong social safety net, at least when compared to some places in Europe or elsewhere. And he was making the point that there is a social safety net. It's just so much of it is embedded in the tax system rather than direct spending. Yeah. And I don't, you know, I don't necessarily I'm a journalist. I don't have opinions. And I know, I know. So I can't agree or disagree with the the goals behind that. But I do think if you want to understand the U.S. economy, it's important to realize like how big and complex and important the tax system actually is. No, and we could go a lot deeper on this even with like another episode, which is this is such a good point, which is how much we rely on the tax code specifically refundable tax credits, etc.

50:41Tax credits for people who don't pay any taxes. Like all of these things through the tax code, whereas, you know, some things like so, for example, people talk about child tax credits. You could you could just instead of talking about child tax credits at all through the Social Security Administration, send out people, send out checks. Instead, you file taxes and you get money back to former Chairman Brady's point at the end. And it does sound like if there were ever some – even if we could ever agree on what an ideal tax system would look like, it would be a never-ending process of sort of like asymptotically getting there over time.

51:17Asymptotically is a good word. Thank you. Thank you. And we're probably theoretically many, many more things that could be done. Can I say one other thing? You know, I sort of I enjoyed hearing this sort of like a certain I don't know old fashioned is the word, but I would say old fashioned view of like, you know, competitiveness, cutting taxes. This is the path to growth, et cetera. It's certain, you know, certain old school vibes that I feel gets a little bit like you don't hear as much these days in conversations about growth. You hear a lot about industrial policy. I thought it was all about the vibes.

51:53No, it's just that specific thing of like, you know, let's cut the taxes. And like, it's nice to hear from a believer. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracey Allaway. You can follow me at Tracey Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at CarmenArmand, Dashel Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. For more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter.

52:25And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we talk about the U.S. tax system, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and then follow the instructions there. Thanks for listening.

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