Paul Krugman asks How Big a Bang for Trump’s Buck? (Wonkish)
Here is Krugman’s conclusion:
So now we have a stimulus from tax cuts and spending increases in an economy already down to 4 percent unemployment, where the Fed is already raising rates to head off potential inflation. That is, we’re looking at normal monetary conditions, where we’d expect a smallish multiplier.
I’m having a hard time figuring out exactly how big a stimulus we’re looking at, but it seems to be around 2 percent of GDP for fiscal 2019. With a multiplier of 0.5, that would add 1 percent to growth.
That said, I’d suggest that this is a bit high. For one thing, it’s not clear how much impact corporate tax cuts, which are the biggest item, will really have on spending. ….
So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal.
How People Spend Their Tax Cuts
13% Will Spend
According to LendEdu, the average monthly paycheck will rise by $130.76. Only thirteen percent say they will spend their tax windfall.
I have huge problems with studies like these, even if the respondents do what they say.
The essential problem is “average” is misleading. So much of the tax benefit is skewed to the top 10% that average calculations are worse than useless.
Income Brackets
The above chart is from United States Income Brackets and Percentiles in 2017.
The Median income bracket is $37,610. That income bracket will net $360 dollars or so, per year. That’s a far cry from the LendEdu average estimate of $130.76 * 12 estimate of $1569.12 per year.
Household Income Brackets
- Make less than $10K: Benefit under $1 per month
- Make the median wage of $37,610: Benefit is $30 per month.
- Make the 75% percentile wage of $65,250: Benefit is $72 per month
- One has to make somewhere between $100,000 and $200,000 to see the “average” benefit of $130.76 per month.
Stimulus?
I fail to see how this stimulates anything. And it adds at least $1.5 trillion to the deficit.
To pay for this, Trump is now considering a very regressive 25-cent gasoline tax hike.
Tax and Spend Republicans
Republicans have now gone full circle. For details, please see Tax and Spend: Trump Proposes 25-Cent Gas Tax, My Alternative Plan.
Questions of the Day
At the median level, is an extra $30 a month really going to help anybody pay down bills, save for education, or save for retirement?
One has to get above the 90% level before there is any reasonable impact on anything, and even that assumes any “savings” will not blow up in smoke over increased inflation or negative stock market impacts.
Word About Savings
I fully support saving. People claim they will “save” most of the tax cuts. It’s savings that provide funds for future growth.
The problem is the rise in deficit is in effect negative savings overall.
Why can’t Libertarians see this?
Libertarian Friends Dead Wrong
Krugman stated “So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal.“
I suggest Krugman is a blazing optimist. The long-term effect of adding $1.5 trillion to the deficit cannot possibly stimulate anything. Moreover, when the next recession hits, I believe the deficit will be double what most expect.
Libertarians hold these positions: Tax cuts are good. Deficit spending is bad.
Unfortunately, my Libertarian friends are so enamored with tax cuts they have zero regard for the net impact of increased deficit spending.
One-sided ideology has gotten in the way.
Tax cuts cannot be good if growth will not pay for the cuts. I am 100% certain that long-term growth will not pay for the tax cuts as structured.
I rarely side with Krugman, and I don’t here, but he is more correct than those who believe these tax cuts will provide a big economic stimulus.
I am a Libertarian. My Libertarian friends who support these tax cuts are dead wrong. And they should know it.
Mike “Mish” Shedlock
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Second, decreasing the funds available to government will continue to pressure the Congress to decrease the rate of expansion of government. It won’t stop it, but it will be a negative for the swamp dwellers. And third, it is likely to accelerate the time when we must address our federal debt, and the grotesque spending which accompanies it.
First, corporate tax cuts are good because corporate taxes are paid primarily by consumers; these cuts will lower the cost of goods bought from corporations.
I’ve had issues with many of your points of view, but with this I agree. We have 3-5yrs max before a total reset of the financial system. We have well and truly entered the parabolic phase and a new crisis, married with a money-printing extravaganza will lead to the inevitable. Prepare accordingly.
@Blacklisted
Anyone that thinks the govt needs more taxes or intends to pay off the debt is literally insane. People should be in favor of saving what ever is possible in taxes before the unavoidable crash and burn. You are also insane if you don’t understand the chaotic reset is hitting within the next 3 years, because the people calling the shots are self-interested bureaucrats with the same practical experience as Krugman – that would be ZERO.
@Mike8760
I actually agree with you. Sorry for any confusion due to a very large error in one of my posts.
I don’t believe corporations should be taxed either. In the end their customers always end up paying those taxes anyway.
Kilroy, accounting is hard to explain, at the corporate level. Let me just say that just because a company shows earnings, doesn’t mean they have money. They are required to use accrual based accounting.
I’m reluctant to get into these tax cut conversations. 99.9999999% of message board posters are utterly oblivious of corporate accounting. A company growing rapidly could actually pay out more than 100% of it’s cash cash flow in a 41% bracket. Why we tax corporations at all is beyond me. If we made share bybacks illegal and eliminated corporate taxes, the US economy would grow at 10% per year.
What does that last sentence mean??
Shoot. I see what I messed up…
Tax cuts are bad should be tax cuts are GOOD.
Bet that confused some folks…
Generally speaking tax cuts are good. As long as there are matching spending cuts.
Been a long day.
An edit feature would be great….
@Mike8760
LOL
That sounds like a plan a politician may actually propose.
Then lets tax them at 200% and pay our bills
Should have looked before I hit enter. @KyleW said it better and with fewer words, LOL I’m not known for brevity.
@Mike8760
No one is saying that – generically speaking – tax cuts are bad. Taxes are a huge cost of doing business and should be as low as possible.
But lets say you’re running a government and taxing everyone at a 20% flat rate which nets you $100 billion a year. However, your expenses to run that government are $150 billion – a $50 billion difference. This means that to fund your government for one year, you have to “print” or otherwise create $50 billion.
Now you have a certain segment of the population that wants a tax cut and they are insistent. You need to keep at least some of them happy so you step up to the plate and slash your taxes by 50%. Now everyone is getting taxed at a rate of 10%. However, at the same time, you decide that to keep another group of people happy, you need to offer more services like free healthcare and free college so you increase spending.
Now your inflow is only $50 billion because of the cut you were so generous with, but your expenses have increased by $50 billion to $200 billion. That’s a difference of: $150 billion – which you will have to print or otherwise “create” in order to fun your government.
Which means the “cut” you were so generous with, wasn’t really a cut.
If you’re going to cut taxes, you also have to cut spending to match.
From a big picture perspective, yes the deficit spending offsets the benefit of the cut. We need tax cuts AND spending cuts. On a personal level, I’m just glad to have a few more bucks in my paycheck.
People who opposed the corporate tax cut are saying a 45% bracket is good., These are people that don’t understand accounting and have never ruporationn a cor
@JSpooner
People always default to the “roads, bridges, and transit” stuff when someone says something about a very tiny government being all that’s necessary…
In fact, in many places – including lots of major cities – the roads and bridges that exist today were originally built and maintained privately. Often you can tell by the name of the street. In my major metro area – which is split by a large river – we have so many “bridge” and “ferry” roads like “Bell’s Ferry Road” and “Cheshire Bridge Road” and many others. Major thoroughfares that started as private roads.
In the case of the Bell family they ran the ferry to turn a bit of a profit and in the process local businesses were able to facilitate trade with each other across this part of the river. And the Cheshire brothers used their bridge to connect their farms – which allowed them to pool their resources thereby facilitating trade between themselves and others. That others came along and used the bridge facilitated trade for everyone.
And transit by wagon, stagecoach, or train was always done by private companies. And I’d wager that were it the same today the systems would be far different and far more efficient than what we have.
Left to their own devices, people will find a way to make things happen. I think a good rule of thumb should be that if you need to put a gun to someone’s head to make it happen, perhaps it shouldn’t be done.
@BillSanDiego
If you give the government a printing press, and tell them that they can print all the money they need, then tax cuts mean nothing. For every dollar they cut from the taxes they collect, they merely print two more to replace it. Those printed dollars then enter the monetary system, reducing the value of all the other currency in the process.
However, there is also have a middle man – the Federal Reserve. Our government doesn’t print this money, they borrow it from the Fed, who prints it for them – for a slight fee of course. A fee which enters the monetary system as more printed currency which further decreases the value of the currency already in the system.
In and of itself, this isn’t a huge problem – and it just might work as long as government is kept curtailed to the barest minimum of things it needs to function. Today however we have a population that expects the federal government to give them everything they want or need for “free.” And we have politicians who care more about hookers and blow than reality so they see no problem with continuing to borrow to appease their voters – without whom the party would be over.
And it isn’t like this is all the fault of the left half of the political spectrum either. The right has it’s pet spending funnels as well for which it is more than happy to fire up the presses: Defense, law enforcement agencies, national parks, land-use, and their own select group of subsidized businesses… And both sides think social security is the bees knees. Everyone believes that because they paid into it, that they are entitled to have at least their own money back. They don’t realize that their money is gone – used to pay benefits to those in the system before them. And at some point in the not-too-distant future, they will have to print up every single dollar they pay out. That’s right – they (and we if you’re a US citizen under about 40) are on the bottom tier in one of the grandest pyramid schemes ever concocted.
And they had the nerve to throw Bernie Madoff in jail.
As a libertarian, I agree. Certainly those services are needed. The question is whether or not those goods/services should be provided by a central planner that derives it’s income through coercion? There’s plenty of literature on the subject, but I believe the answer is “no”.
@JSpooner
Deficits don’t, out of the blue, create additional resources which government can spend. Whatever government spends, is either taken, or received as a gift, from someone. Who at some point produced it. It doesn’t become more nor less theft simply by an obfuscative head fake involving bonds, banks and printing presses.
It’s the command over, and spending, of real resources that matter. If government spends more resources than it is explicitly given voluntarily by free individuals, those resources are ones the government has stolen. Whether the theft was done by gun to the head, by gun to some future kid’s head, or by debasement of a currency people now and future are forced to use by gun to their head, is utterly irrelevant. Covering up a crime by attempting to muddy the waters with layers of obfuscation, doesn’t magically turn the crime into a non-crime. It may confuse certain classes of well indoctrinated dunces enough to cause them to lose track of the ball, but that doing so doesn’t magically make it a non-crime either.
“If tax increases never raise as much money as predicted because of their negative economic impact, then it stands to reason that tax cuts will not cost as much because of their positive economic impact. I’ve heard the first proposition declared on this blog many times. More cognitive dissonance. You can’t have it both ways.”
It’s only cognitively dissonant, if you join Krugman down at the ostrich farm and insist the world is One Big Macro Aggregate. In practice, tax cuts and tax increases are both written by lobbyists. Hence for lobbyists. Lobbyists produce no value. Hence, to benefit them, it’s necessary to take value from someone who does produce it. Taking from the productive and handing to the connected, regardless of whether it is done by way of tax “cuts” or “increases,” is a net negative.
“Dissonant” would only be accurate if you’re talking about reversing the exact tax increase that was previously enacted (assuming the environment is still the same). That “may” happen sometimes, as even broken clocks etc… But don’t count on it. Hence don’t count on politicians and their sycophant army not managing to figure a way to steal from productive people, regardless of whether they label the specific mechanism of theft an “increase” or a “cut.”
I consider myself a libertarian (with a lower case “L”). My support of any reduction in tax rates is primarily a result of accepting the moral principal that taxation (i.e. coercive expropriation of money from individuals) is theft. Deficits are of no consequence to the moral argument, so I don’t see any inconsistency with my position as a libertarian.
Its clear the Feds will spend every nickel you give them, and then borrow to spend even more. Every dime kept by taxpayers is a dime not available to the Feds. I will be using my Trump tax cut benefit of $250 per month to help pay for my kid
I am not sure
Don’t Any / all “cuts” to anything the govt does, diminish its power/control/influence over anything? of course it does. Cut rules, budgets, it all diminishes its power. That is good for liberty, bad for the currency, is the consequence.
Wash, rinse, repeat. It is the same game played over and over again. The movie Groundhog Day, D.C. style. The money is created out of debt, so debt needs to be created faster and faster and faster, just to run in place. There is no intention of balancing the budget- the politicians just give it lip service.
As for the tax cut benefits, do those numbers include the increased child tax credit? That is a dollar-for-dollar reduction in taxes for those families and $1400 of it it is refundable.
Spending is never going to be cut. If there isn’t an extra $100 billion in debt for GOP tax cuts, there will be an extra $100 billion in a new Democrat entitlement. Tax cuts are better because taxes are raised from time to time, entitlements are never cut.
“… I support the tax cuts in the hopes that spending cuts will come later.”
Hahahaha! Standard libertarian excuse. You know very well that there will be NO spending cuts. Sure, there will be cuts to SS and Medicare and social programs but they will be overshadowed by more corporate giveaways and more war spending. Neither of the two major parties is really opposed to either of those.
I am Libertarian as well and I support the tax cuts in the hopes that spending cuts will come later. I abhor borrowing from our kids and grandkids to pay for anything. It’s immoral. But I want to “starve the beast” and cut as much money flowing to DC as possible. Mish, answer us this: If you don’t want tax cuts because of the deficit, then do you support tax hikes to eliminate the deficit? Or do you think tax rates are just about right where they were last year?
So why did this message get grouped with my reply to Greggg? These are two separate thoughts.
We need more pessimistic politicians. As in a greater number of them. And also to a greater degree of pessimism. This failed notion of using leverage to juice the economy cannot continue.
Most surveys are multiple guess or either/or choices. While most of the good ones will have an open ended comment section, I doubt anything said in those comments are considered when building the graph.
Did not the Atlanta Fed just predict 5.4% GDP first quarter? You all underestimate the stimulus of deregulation, tax cuts and paring down of govt overhead. You will see.
“All well and good unless you cut taxes and then continue to piss away the same as before on wars, social engineering and corruption.” Exactly! It is obvious there are no adults left in DC, just crooks and liars.
Same thing for the lower corporate tax rate. If it is so beneficial to Ireland and England, why is it bad here in the US?????
If tax increases never raise as much money as predicted because of their negative economic impact, then it stands to reason that tax cuts will not cost as much because of their positive economic impact. I’ve heard the first proposition declared on this blog many times. More cognitive dissonance. You can’t have it both ways.
What is the difference between cutting taxes and borrowing the difference, and keeping taxes the same, borrowing money and handing it to taxpayers? Actually nothing. Except the first we would consider libertarian and the second would be liberal in modern parlance. Both of course are highly irresponsible. Which is why we need actual conservatives in government.
Mish, tax cuts are good (but not here?). Why is this related to increased deficit spending? Isn’t that so because they are spending beyond control, beyond what the house makes…this is also a libertarian position, slash the bureaucracy and their spending so they don’t burn public money……so the solution is actually lets leave tax cuts alone for the time and address the real issue, profligate wasteful spending public spending …this is totally a lIbertarian position from day one…..not just libertarian, but a common sense position..
“Most Libertarians I know support cutting taxes because it gives government less money to piss away on wars, social engineering and corruption.”
All well and good unless you cut taxes and then continue to piss away the same as before on wars, social engineering and corruption.
Okay, so what you’re saying is that it will cost a lot and not save a lot?
I thought this was a done deal… guess not. “SEC blocks Chicago Stock Exchange sale to China-based investors”. link to reuters.com
Tax cuts and increased spending does not sound at all libertarian to me. The libertarians I know, such as Rand Paul, want less taxes along with spending cuts to balance the budget and shrink government. Libertarians are supposed to be fiscally conservative so it seems impossible for a real libertarian to favor increased spending & deficit. We may need to add a new acronym to the lexicon: LINO – Libertarian In Name Only.
I have never ever tell the truth on any survey. The only time I ever answer surveys is when I’m pissed off enough to answer the to the strange phone number appearing on the screen and it’s usually before an election. Wanna know how some pols missed by so much? Probably because most people are just like me.
Couple any stimulus from tax cuts and spending increases with the depressive affects of tariffs, trade wars, and immigration cutbacks for a net negative.
The arguments in the section that says only 13% of the savings will be spent are specious. Let’s look at the category “saving for a vacation”. What will happen to that, based on the intent? If it’s not raided and spent first on some other need, it will be, yes, spent on a vacation. Some of the other categories, such as “save for children’s education” and “save for retirement” may involve a delay, but they, too, are intended to be spent. And what about “Save in bank”? Will the money remain there forever? Or will it at some point be spent? And finally, the biggest category, “pay down debt”. Once the debt is “paid down”, guess what? They will have the ability to borrow again, in the future, to, yes, spend, and many/most will do exactly that.
I have no idea what percentage of the tax cut will be spent, but I’m very confident that 13% isn’t even close.