As you plant…so shall you reap.
Everything has its season. Stock markets. Empires. Tax cuts.
Here in France it is mushroom season. This weekend, our friend François divulged his secrets. He offered to show us where to find the ‘cèpe’ mushrooms favoured by the locals.
The brightest, most attractive mushrooms are the most poisonous.
‘Mushrooms are finicky,’ he explained.
‘Everything has to be right. The temperature. The humidity. The light. Some years, they are everywhere. Other years, you can’t find any at all.’
Each season has its purpose. Each has its pleasures and challenges.
There is youth…young adulthood…maturity…and retirement. Live to be 80, and you spend one-quarter of your time in each season.
You grow. You learn. You take charge. And then, in the final stage…you turn over the controls to someone else.
You expand. Then you contract. You accumulate…and then you give up. You make mistakes in one season…and you pay for them in the next.
Today, we reflect on the autumn season…when debts get reckoned.
But we interrupt this autumnal reverie with a flash update: Last week, the Trump team’s centrepiece legislation, a massive tax reform that would be a ‘miracle for the middle class’, was born.
This week, the miracle is dead.
Yes, there are seasons for tax reform, too. A time to cut taxes. A time to increase them. And a time to refrain from embracing damned foolish time-wasters.
Myths and delusions
The real miracle of the GOP-Trump tax plan was that anyone took it seriously, even for 48 hours.
Everything about it was either fraudulent or contradictory…usually both.
In that final woebegone category — somewhere between claptrap and embezzlement — must figure Treasury Secretary Steve Mnuchin’s comment, this weekend, to NBC’s Meet the Press:
‘With our plan, we actually pay down the deficit by $1 trillion, and we think that’s very fiscally responsible.’
Behind this remarkable statement is a whole Mount Olympus of myth and delusion, the tax gods frolicking lasciviously with the economic nymphs and financial satyrs.
Supposedly, cutting the corporate tax rate from a headline rate of 35% to 20% will bring on such a debauch of investment, employment, productivity, profits, and income that the feds will soon be rolling in cash…
So much that they will not only fund current deficits (soon rising to $1 trillion a year), but also fund the cost of the tax cut (about $4 trillion, but nobody really knows because the Deep State tax lobbyists haven’t even begun working on it).
How the gods must have laughed!
Imagine…a $4 trillion tax cut that ends up not only ‘paying for itself’ but brings another $1 trillion to the nation’s bottom line. Now, that is truly a miracle.
Or a bamboozle.
The effective corporate tax rate — what businesses pay on their taxable income — is only 22%. Knocking off another 2% is hardly going to bring about an economic renaissance.
A big tax cut for the middle class — if that were on offer, which it isn’t — wouldn’t make much difference either.
The bottom 75% of taxpayers contribute only 14% of the feds’ tax revenues, with an average tax rate below 10% of income.
Neither corporations, nor the middle class, are big taxpayers. The big taxpayers are the rich — the people the Trump team has promised not to favour with a tax cut.
And even if you did give the rich a tax cut — which is what this tax proposal really is — it would be very unlikely to result in additional growth.
Because the rich don’t run out and spend every extra dollar that comes into their hands. Instead, they invest it.
But wait…more investment…more capital spending…more jobs…more productivity — that’s what we want, right?
Oh, dear reader, if only it were that easy!
More capital in the hands of the capitalists ought to result in more investment and more output. The bulbs and seeds planted in the springtime ought to sprout jobs in the summer and profits in the fall.
But the feds have fouled the Earth. Now, the seasons no longer reward thrift and industry; they punish corruption and waste.
The Fed has held short-term interest rates near zero for the last eight years.
Corporations have had access to all the investment money they wanted. Net of inflation, the money was free. And what did they do with it?
Did they build new factories…hire and train more workers…develop more infrastructure…sell more and better products…improve their services and increase their profits?
The rate of ‘real’ (inflation-adjusted) net capital investment fell. Instead, US corporations spent $5.5 trillion over the last 10 years, much of it borrowed, to buy back their shares and cancel them (a way of engineering a higher share price for their remaining shares).
We’ve never met a tax cut we didn’t like. This one — were it to pass — is no exception. It would save us a lot of money.
But even in today’s season of hallucination and corruption, the proposed tax cut is a masterpiece — a flimflam wrapped in a swindle.
It would do nothing for the middle class or for the economy. Tax cuts let people keep more of their money. Then they do win-win deals; the economy grows.
But this economy doesn’t lack money. It has too much fake money lent at fake interest rates.
What it lacks is honest money…and honest people in charge of it.
For Markets & Money