Thursday, July 13, 2017

Fiscal policy dreaming

The Federal government last month passed a dubious milestone, having spent $4 trillion over the previous 12-month period for the first time ever. That works out to over $11 billion per day. To make matters worse, the budget deficit is once again on the rise, as spending is outpacing revenues. The budget deficit is now running over $700 billion per year, or roughly 3.4% of GDP, up from a post-recession low two years ago of $411 billion, or about 2.2% of GDP.

Although we obviously need to rein in spending, it would also be smart to cut taxes, particularly corporate taxes. The Feds collected $300 billion from corporations over the past year, which was less than 15% of adjusted corporate profits (according to NIPA figures) in the year ended last March. A relative handful of corporations reportedly hold well over $2 trillion in profits they refuse to repatriate—they've already paid tax once on that money overseas, why pay another 35% for the "privilege" of repatriating the money? If corporate income taxes were lowered, say, to 15%, the Feds might wind up doubling corporate tax collections (15% of $2 trillion) overnight as those profits were repatriated, and everyone would be thrilled. Most importantly, however, a much lower corporate tax rate would most likely result in a reverse wave of corporate inversions—the U.S. would instantly become the most attractive place on earth to do business! With companies rushing to repatriate profits and new companies rushing to relocate here, it's a safe bet that employment would surge and individual income taxes would surge as well. What's not to like about that?

Just about everyone—on both sides of the aisle—agrees that corporate income taxes are too high. Why is this such a hard problem to fix? It's the lowest-hanging fruit out there. Instead, the Republicans are struggling with healthcare reform, which is not something that government can easily achieve. The healthcare industry responds weakly (and mostly negatively) to politician's ministrations, but it would surely respond powerfully and productively if the heavy hand of government were removed altogether. Free markets always beat administered markets. The proper role of government might be limited to administering subsidies to the poor and the unfortunate among us, but then again that's what charity is for. I've always believed that private charities work far better than government bureaucracies at taking care of the sick and the poor. I have more discussion of this in a recent post.

In the 12 months ending June 2017, federal spending totaled just over $4 trillion, while revenues were $3.3 trillion. Spending is rising at a 6-10% pace, whereas revenues have been stagnant for the past 16 months.

The weakness in revenues can be traced to individual and corporate income tax collections. Payroll taxes have been rising at a steady 5-6% pace for the past several years, in line with the growth in jobs and incomes. Wealthy individuals and corporations can minimize their taxes by postponing income, accelerating deductions, and avoiding the realization of capital gains, but working stiffs have no way of avoiding their monthly FICA deductions. The anticipation of future cuts in income taxes is likely having a big adverse impact on federal tax collections these days, and it's not helping the economy to grow either. Best to get this done ASAP, GOP!

The chart above shows the evolution of the federal budget deficit. We were staring into the abyss in 2009, with a staggering deficit $1.5 trillion, which was more than 10% of GDP. Things look better now, but federal finances are once again deteriorating on the margin.

The chart above shows the long-term trends in spending and revenues as a % of GDP. If anything is out of line, it's spending, which is running above its postwar average and is accelerating on the margin. All that's really needed is to slow the growth in spending and apply a good dose of tax-cutting, which would likely boost the economy and tax collections as well, much as we saw in the late 1990s. Spending restraint and growth are the sweet spots that Congress needs to be hitting.


Heinz Geyer said...

Not sure about your obsession to lower corporate taxes, it just creates a massive loophole for the 1%. Tax rate should be on a level with income tax, double tax can be avoided with other measures, eg low income shareholders get rebate etc. Investment is sheltered as depreciation reduces tax rates, dishing out money on repurchasing shares is made less attractive. And the foreign cash? just change the tax code, there is no reason to keep the exemption!

Rich said...

People can move from healthy to sick quickly and without warning. So at T1 person A may think no insurance or bare bones insurance works great, but at T2 recent health problems with insufficient insurance may produce bankruptcy.

So if there is a way to keep them in the system paying premiums in good times there will be a cost-effective way to deal with the bad.

Barring that, letting them opt-in when ill would be truly untenable.

That leaves two options: single-payer or a mandate with premium support. The Heritage Foundation came up with the latter, Romney passed it in MA, Jim DeMint then said it could be a model for the nation.

Obama naively believed that was the road to compromise.

Rich said...

Oh, and the really hard choices relate to end of life care when the costs rise dramatically to often extend life only a short time. Most of us want our loved ones to receive care as long as any hope exists but it's crazy expensive. Some call any attempt to address that death panels but that merely demonstrates ignorance and callous indifference to the primary driver of costs.

steve said...

Oh, and the really hard choices relate to end of life care when the costs rise dramatically to often extend life only a short time. Most of us want our loved ones to receive care as long as any hope exists but it's crazy expensive. Some call any attempt to address that death panels but that merely demonstrates ignorance and callous indifference to the primary driver of costs

Truer words were never spoken. THIS is THE problem with American healthcare Vs Euro healthcare. The craziness we allow to extend a life a few mos is appalling and YES I have lived through losing my two parents to extended illness.

Of course, we don't have the courage to address it. So we'll muddle through and the GOP plan will fail. How about that "drain the swamp" nonsense?

George Phillies said...

An interesting feature here. Social Security tax yields are rising at 5-6% a year, some of which is more people being employed. However, they only apply to the first $120,000 or so of income, so they do not include income advances of the wealthy. We wealthy folks (well, not me; I am retired and have almost no taxed income) are already capped and pay the same amount give or take every year. How can income of the middle and working classes only be growing at 1-2% a year, when the amount they are paying in Social Security tax is growing at 5-6% a year?

I believe all the numbers are true, but there is a gap that I am missing someplace.

Scott Grannis said...

Jobs are increasing almost 2% per year, inflation is about 1.5% per year, and wages are increasing about 2-2.5% per year: that gives you nominal wage growth of 5.5% or so, most of which is captured by FICA taxes.

The Cliff Claven of Finance said...

Corporate profit margins are high.

Corporate stock valuations are at a record (median stock)
and at the second or third highest levels ever (market cap weighted average)

Corporate bonuses are very high thanks to financial engineering,
-- stock buybacks to boost earnings per share only,
instead of capital investments to boost future sales and EPS.

Cut US corporate taxes now, when corporation are raking in profits,
and there will never be another Republican President in our lifetime.

Talk about tax breaks for the rich !

If you cut taxes now, when the economy has been growing for eight years,
then what would you recommend when the economy is in a recession?

I'd recommend cutting taxes in a recession.

You recommend cutting taxes after eight years of growth.

One of us is wrong.

I think its you.

My proposal would be counter-cyclical fiscal policy.

Your proposal would be pro-cyclical fiscal policy
-- potentially blowing up a financial bubble even more!

Your comments on repatriation of overseas profits are wrong.

Up to half the "overseas" profits have already been put to work in America by intermediaries (banks) .

In fact much of the money sits in NYC banks who loan it to other corporations here and elsewhere.

Of course the US-headquartered company A can not use their "overseas" money in the US,
but they can still borrow money here at low rates for use in the US if they want to.

Are you suggesting some shortage of money available for US corporations to borrow?

They've borrowed a huge amount of money at low interest rates.

They don't need to use their overseas money here when borrowing other money is so cheap..

And they don't pay 35% US income tax on repatriated money.

If they've already paid a 25% foreign corporate income tax ,
then they would owe a 10% US income tax if repatriating to the US,
and no tax at all if they paid 25% elsewhere, and the US tax rate was 25% too.

Of course tax swindlers like Apple Corp,
who manage to pay under a 20% average corporate tax rate,
would not repatriate if the US tax rate was 20% or higher.

We need to rein in government spending and INCREASE taxes.

There may be short-term pain, but running large deficits leads to
an expanding government sector and inflation
(consumer price inflation and/or asset price inflation)

The ONLY way to reduce government spending
is to make the taxpayers pay for all of it.

There should be no deficits during an expansion.

Deficits are okay during a recession
-- they would be counter-cyclical
and damp the business cycle.

Over the full business cycle,
government spending
should equal government revenues.

Right now the American people get $700 billion
of federal spending almost "for free"

If people get stuff, and don't have to pay for it,
then they will want more stuff.

Make the American people pay for all the government they are getting,
and I believe they will soon decide government spending needs to decline.

Don't do that, and we'll morph into a socialist nation
(government spending at all levels over 40% of GDP)
in ten to twenty years.

Scott Grannis said...

Cliff: you can rant all you want about how corporations and the rich are "greedy." But the facts remain: corporate profits are very healthy, but investment and growth are sub-par. Corporations are doing inversions (to incorporate outside the US) because they can't stand the 35% tax rate here. Art Laffer taught me long ago that when taxes are high enough to affect people's behavior, then they are definitely too high. Businesses must always maximize their profits, otherwise they cease to exist. When tax rates are significantly lower overseas than they are here, we will always be losing investment dollars to some other locale. Sure, Apple can borrow money to pay dividends without repatriating its profits, but why should we be encouraging our companies to leverage up in order to avoid paying taxes? Apple is not a tax swindler, its management is acting in the best interest of shareholders. If they were to act otherwise, they would not be doing their job. Companies exist to make money, otherwise they are out of business.

I don't like deficit spending anymore than you do. I think that cutting corporate taxes would be a great way to reduce the US deficit. You can't spend and/or tax yourself to prosperity.

Fiscal policy should not be used to fine-tune the economy. Taxes should always be as low and as flat as possible all the time, and government spending should always be minimized. Changing policy only creates uncertainty, and that reduces investment and prosperity over the long run. Most recessions can be traced back to errors of policy. Policy is set by humans, and humans are fallible, not angels and not geniuses.

Benjamin Cole said...

Fascinating post, and I agree, in general, productive behavior---that is, working and investing---should never be taxed.

My two cents is that the GOP has short-sightedly squandered a chance to become a pro-business, majority party for several generations.

Trump was elected by suggesting he would get out of overseas foreign-policy dead-ends, close the border to illegal labor, seek some redress on trade issues, and give the middle-class a tax cut.

A lot of Trumpism reads as: Tighter labor markets for working Americans.

Well, Trump said a lot of things during his "campaign," but that is what the GOP rank-and-file seized upon.

So Trump's platform after election becomes tax cuts for the rich and some sort of indecipherable healthcare "reform," and if anything the US may get drawn into yet another lose-lose situation, this time in Syria.

Would it have killed GOP solons just for one year say, "This year are cutting the marginal income tax rates on people making less than $200,000 a year." That done, let a year go by, and then cut corporate income taxes, having made the point.

Will ever the GOP say,"What is the upside in a Afghanistan, Iraq or Syria?" The GOP is supposed to think along business lines. What are the benefits from endless Asian land wars? Nixon pulled out of Vietnam, perhaps his one achievement.

Now we have a deeply fissured, directionless GOP and a rising national debt, despite the fact the GOP controls the House, Senate, Oval Office and Supreme Court.

The last time the GOP controlled as much (2000-2008) we got Iraqistan and the collapse of our financial sector.

Egads, it it tough to find some to vote for….

steve said...

Most people seem to miss a fundamental point about lowering corporate tax: individuals can't HIDE their earnings at a lower tax rate! They must report their earnings at the individual rate sooner or later. Moreover, corporations spend an inordinate amount of money AVOIDING tax at a higher level that could be invested at a lower level. There is not one possible reason I can think of to NOT lower corporate tax say 15% or even eliminate. Business is not investing enough money and that's due to high corporate tax. This is low hanging fruit! If a GOP congress can't get this done with a GOP executive, we're screwed.

The Cliff Claven of Finance said...

Mr. Grannis:

"Cliff: you can rant all you want about how corporations and the rich are "greedy." "

Your comment was an uncalled for character attack,
and even worse, on a red herring -- something I did not say:
I suppose anyone who does not agree with you is "ranting"?
Great way to discourage debate.

What I said is corporations are doing very well now.

Although profits per share are being boosted by borrowing a lot of money
for a lot of stock buybacks.

Helping corporations when they don't need help makes no sense,
and will play into the hands of Democrats,
who would then have real ammunition:
"rich Republicans give tax breaks to the rich",
to start winning elections.

You said:
"I think that cutting corporate taxes would be a great way to reduce the US deficit."

Odd that you would say that, since you don't seem to care about deficits:
- You want lower government spending (don't hold your breath)
-- You want lower taxes (that could happen)
--- The result would be higher deficits (that happened to Reagan too)
Ronald Reagan added $1.86 trillion of debt,
a 186 percent increase from the $998 billion of debt
at the end of Carter's last budget, FY 1981.

As I said in my first comment,
deficit spending allows government spending to grow
without the immediate pain of higher taxes to pay for it.
Even worse is borrowing money from other nations
to fund federal deficits -- that makes growing
government spending as "painless" as possible.

If you really wanted to minimize government spending,
the first step would to be to make sure that the people
are paying for all the government they are getting
-- not borrowing money from China and Japan
for "painless" deficit spending.

Corporations only provide the federal government
with enough revenue to pay for 7.5% of total federal spending.
Historically that's a low percentage.
Is there a "right" corporate tax rate, not 35%, and not zero?
How about the "right" rate being one that's similar to other developed nations - 25%,
which is also the average effective corporate tax rate US multinational corporations pay now.

Except Apple.
Apple is a serial tax evader:

Why would 15% be a "right rate" ?
Even if 15% was "right", why not wait until the economy is in a recession to
stimulate it with a huge corporate marginal tax rate tax reduction from 35% to 15% ?

"Art Laffer taught me long ago that when taxes are high enough to affect people's behavior,
then they are definitely too high."
That's a meaningless platitude.
Taxes always effect behaviors.
The size of the effect should correlate positively with the size of the marginal tax rate.
Reagan had the opportunity to make a huge percentage reduction in the marginal tax rate.
Big effect on the economy.
Also big deficits.
But now we don't have 70% marginal rates that could be cut in half, as Reagan did.

And it looks like we'll have a $700 billion deficit soon,
even before the next recession starts.

Now is not a good time to expand the huge non-recession deficit even more with big tax cuts.
Unless you think deficit spending is good economics.

"Businesses must always maximize their profits, otherwise they cease to exist."
Amazon's amazing growth contradicts that statement.

To Steve:
"Business is not investing enough money and that's due to high corporate tax."

Perhaps slow sales growth does not justify a lot of new capital investments?
Not when they can boost EPS by borrowing money at low rates for stock buybacks.
And boosting EPS ought to boost most corporate bonuses too
Remember that birth rates are low, and populations are aging in the US, Europe and elsewhere.
The demographics encourage a slowdown in capital investments.
Also, online businesses require significantly lower capital investments
than brick and mortar businesses.

randy said...

The following is provided without comment - other than to note I don't want to pay higher taxes either, and recognize massive waste in most government operations. But it is a counter to the drumbeat that all US problems are high taxes.

Why Canada Is Able to Do Things Better

The United States is falling apart because—unlike Canada and other wealthy countries—the American public sector simply doesn’t have the funds required to keep the nation stitched together.


The Organization for Economic Co-Operation and Development (OECD), a group of 35 wealthy countries, ranks its members by overall tax burden—that is, total tax revenues at every level of government, added together and then expressed as a percentage of GDP—and in latest year for which data is available, 2014, the United States came in fourth to last. Its tax burden was 25.9 percent—substantially less than the OECD average, 34.2 percent. If the United States followed that mean OECD rate, there would be about an extra $1.5 trillion annually for governments to spend on better schools, safer roads, better-trained police, and more accessible health care.


My wife and I signed our 2016 tax returns about a month ago. In total, we gave up about 42 percent of our income to the federal government and to the province of Ontario. Add in property taxes, gas taxes, and sales taxes, and the figure goes up to about 46 percent. By my rough calculation, a similarly situated couple living in an equivalent part of the United States—I picked Chicago, which sometimes is described as a sort of sister city to Toronto, where I now live—that number would be about 10 points lower, at 36 percent.

What does that 10 percent premium buy for my family? Aside from universal health care, there’s world-class public schools, a social safety net that keeps income inequality at rates well below America’s, and an ambitious infrastructure program that will help Canada keep pace with its swelling ranks of educated, well-integrated immigrants.

The Cliff Claven of Finance said...

very interesting post, randy

Paul said...

Scott, nice post as always. I've never felt the urge to comment before, but I've grown tired of reading Cliff's longwinded and misguided replies. I encourage him to be a little less sensitive (boo-hoo) and also to stop creating a new paragraph after each sentence. It's very unnecessary. 99% of what he says makes absolutely no sense, yet above he decides to show the world how smart he is (or think he is) and pick apart your thoughts piece by piece. Rest assured most readers do not heed his advice. How in the world does it make any sense to save corporate tax reform until the next recession?! Let's wait to reap the benefits until we're up the creek without our paddles instead of creating growth and shoring up the economy now in preparation for the next recession or eliminating one altogether. What a ridiculous idea! Probably just a guy day-trading in his basement would be my guess. Remember, I told him not to be too sensitive. I'm being very critical of his idea, but I hope that's okay.

All that being said, most of the comment section is enjoyable to read and intelligent discourse. One know-it-all can't ruin that!

The Cliff Claven of Finance said...

Paul excellent use of ridicule and character attacks ... and no data or facts.

Very much like a liberal style of "debate".

My posts contain data and facts.

I put my real name at the top of every comment.

It should be easy to see my name and NOT read the comment.

The fact that Zero Hedge is always bearish is no secret.

You are angry because I pointed out this blog is always bullish.

I skip lines between sentences because of a vision disability.

Sorry that offends you.

If Mr. Grannis does not want me to comment on his blog,
he can ask me, and I will comment no more.

People who own stocks can get very bullish as the bull market goes up,

thinking themselves to be financial geniuses near the peak,

and even get angry if someone says valuations are too high,

but every bull market in history has ended,

and I point out that the prior bull markets ended with high stock valuations,

just as we have today.

Why pointing out stock valuation facts would make you angry, I don't know.

Scott Grannis said...

Paul and Cliff: reasoned, dispassionate discourse and discussion is always welcome on this blog. No one has a lock on the truth when it comes to markets. I enjoy being challenged, since overlooking important facts is a mistake I try hard to avoid.

Alex Mark said...

Hey, Scott is bullish, and he was right for 8 last years, and bears were wrong, that is fact

The Cliff Claven of Finance said...

Economists are generally always bullish
They are always bullish so they will be right 80% to 90% of the time.
That's what Scott does, based on this blog.

Predicting a recession that does not come could cost an economist his job.
That's why so many economists don't do that.
In fact we're lucky if they even recognize a recession six months into one!

Economists as a group have never predicted a recession.
Which means as a group they have never predicted a bear market.
If you want to be bullish all the time, this is the blog for you.

I just want to remind you that its very unlikely the US has had its last bear market
and recession back in 2008 / 2009 and that will never happen again.

Scott Grannis said...

Cliff: I think you are overstating your case. Economists are not always bullish, and they are not always bullish in order to be right 80-90% of the time. Some economists have successfully predicted recessions. It's hard to predict recessions. It's hard to predict recessions because recessions usually happen when a majority of people discover that things are not working out the way they thought. Recessions almost always blindside the majority.

Correctly predicting recessions is no guarantee of investing success. There are many cases of big bear markets that have not preceded nor predicted a recession. Correctly selling in advance of a bear market is wonderful, but getting back in at the right time is not easy.

Some of the world's greatest investors have never tried to time the market, with Warren Buffett arguably being the best example. Another that comes to mind is Howard Marks of Oaktree Capital Management. He doesn't try to predict recessions, but he does try to take less risk at times (like now) when the market appears very complacent, and he tries to take more risk at times when the market shuns risk. I think that's smart. Check out his most recent letter to clients which expound on these ideas. Highly recommended:

The Cliff Claven of Finance said...

Economists as a group have never predicted a recession.
That means as a group they are always bullish.
And always bullish has an incentive -- you're right in 80% to 90% of years in a decade.

Few big bear markets were not followed by recessions, not "many".
You are wrong to say "many".

One of those was the 1987 crash, which I remember.
The S&P 500 total return for 1987 ended up being +5%, if I remember correctly.

Hard to call that a bear market year even if the crash
from the high point for that year (up 25-30%) was technically a bear market.
It was a bear market you could sleep though and not lose a penny when
including dividends.

I had 1/3 of my investments in cash before the crash and reinvested in the weeks after the crash.
The wife remembers me going to the library for their ValueLine every night after work
for a few weeks -- pre-internet stock analysis was tough.

Buffett holds a majority of his stocks less than 10 years.

He increases and decreases his positions too -- an under the radar
form of timing the market.

BRK.A had over $80 billion in cash in May 2017 according to
That's a lot of cash for a guy who says he hates cash.

A buy and hold investor would not have $80 billion cash.
A value investor with $80 billion cash is timing the market, perhaps inadvertently.

Because stocks are most overvalued before a recession
= few undervalued stocks to consider buying near a market peak.

Unknown said...


Great info presented as always! Looking at your plot of government expenditures and revenues, it would be interesting to see in a format adjusted for inflation and on a per capita basis. I will put that together but throw it out there to you in case it is of interest to you and is easy for you to put together.

Scott Grannis said...

Rick: the best way to understand how things are evolving is to divide spending and revenues by nominal GDP. That incorporates inflation and real growth automatically. I have shown that chart off and on over the years. Both spending and revenues look like they are within reasonable ranges from an historical perspective. Currently, spending is about 21% of GDP, and revenues are about 17.5%.

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