By Professor Ricardo “Rick” Ulivi, Ph.D.
September 2017

The financial goals of our nation can be summarized as follows: achieve sustainable economic growth, low inflation, and full employment. Currently, these goals have been achieved; the economy has been growing for over nine years, inflation is super low, and we are at full employment. It seems we have reached economic nirvana!

There is a popular saying that goes, “If it ain’t broke, don’t fix it.” Tinkering with our economic success is what the current administration is gearing up to do by proposing major tax reform. Will it improve our economy, or will it adversely affect it? Let’s analyze the question.

There are basically three revenue options for the proposed tax reform: it can be revenue neutral, negative or positive.

Revenue Neutral

This means that any tax cuts have to be offset by tax hikes so that there is not a drop in government revenue. Who may get their taxes reduced? Corporations and the ultra-rich are my bet. Don’t forget that the Trump administration has several billionaires, plus some Goldman Sachs alumnae working for it. Given that the first rule of the free enterprise or capitalistic system is “self-interest,” I doubt these mega rich folks are thinking of the homeless, or just about anybody else.

Who will get the tax hikes to make up for the revenue lost? Not the poor. According to former presidential candidate Mitt Romney, something like 45% of households in the US pay no income taxes, so they ain’t going to pay any tax increase. Who will then? The rich or the middle class; of these two groups, who do you think is going to pay for the tax cuts for the super rich? The middle class, of course!

Some pipe dreamers think that cutting taxes will make the economy grow stronger; perhaps, but we are at full employment already; any faster growth is likely to generate inflation, and in that case, most of us will lose.

Revenue Negative

This means that a tax cut reduces government revenues, which makes sense when you are in recession because you want to increase people’s spending power. However, the US economy has been growing for over nine years, and there’s full employment. So I don’t understand what a tax cut will achieve now, except make a few megarich folks even richer. Not that I am a very jealous guy, but our government continues to run a massive deficit, and has an unprecedented amount of debt. If the deficit gets any larger, we are really digging a deeper hole for all of us. I surely hope the tax proposal is not revenue negative.

There is, however, one area where cutting taxes may benefit the economy. Corporations have trillions of dollars in profits that reside abroad, so offering them a onetime tax holiday might encourage them to bring back that money. This makes a lot of sense, and I strongly support this move. The negative side of this tax cut is that it encourages corporations to keep future money abroad in hopes of a later tax holiday, but that’s a problem for later.

Revenue Positive

A tax cut that’s revenue positive implies that it would make the economy grow at a faster rate, thus raising revenues by a greater amount that the tax cuts. Could this happen when we are already at full employment? I doubt it. And if it does happen, you can expect interest rates and inflation to take off, making it very difficult for the economy to sustain any extra growth achieved thru tax cuts.

If Tax Reform Makes No Sense, What SHOULD We Be Focusing On?

Rather than tax reform, we should be debating about how we are going to get the federal deficit under control, and better yet, how we can balance the budget to eliminate deficits. The debate should be on where the government should be cutting spending, rather than on tax reform.

For cutting spending, these are the major areas: defense, Medicare, Social Security, Medicaid, and Veteran’s benefits. Remember self-interest? Because I am on Medicare, and shortly will be on Social Security, I would prefer cutting defense. My neighbor, who is young, thinks we should cut Medicare and Social Security, and increase defense spending. He’s concerned about North Korea, Iraq, Afghanistan, Iran and Venezuela. As you can imagine, we don’t see things the same way.

The Debt Ceiling Is Being Increased Any Day, and?

What would you think if, let’s say your son, who regularly spends more than his income, maxes out his credit card due to the excessive spending? You would not be happy; but then you find out that he is asking his credit card company to increase his credit limit because he’s spent more than the maximum allowed. Wouldn’t you have a talk with him about how to get his spending under control? Well, the Trump administration is now asking Congress to raise the debt limit because it has maxed out the previous ceiling. And nobody is saying much. Guys, this is totally crazy and we will ALL pay for this irresponsible financial management.

To balance the budget, you’ve got to cut!

What to cut is always VERY difficult. When I was younger, and short on money, I told my wife we needed to make spending cuts. She suggested we save money by having me eat less; after all, she thought that would not only save us money but would make me healthier. I, in turn, suggested she should stop spending so much on clothing. Her reply was she thought I always wanted her to look her best! Cutting expenses at the personal level is very hard, so imagine just how difficult it is to do at the federal level!

In sum, I think all this talk about tax reform won’t get us anywhere, except maybe make a few billionaires even richer, and make the middle class less well off. Rather than focusing on tax reform, we should be talking about deficit reduction, while making sure Medicare and Social Security are not touched!

To set an appointment to discuss this further or to review your finances, call me at 1-714-771-6000