The Ghost Who Said ‘Boo’ To Janet Yellen

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“Yellen Sees U.S. Companies Pushing Congress To Back Global Tax Deal.” That’s a Bloomberg headline from this morning. In her interview, she said American companies are likely to provide crucial support. Crucial support.

Kind of like falling on your sword, huh? Throwing yourself in front of the train. Or at least I have this picture of CEOs sobbing wildly because they can’t get a tax hike that would reduce their profits, lower their stock prices, cut back on their payroll, and undermine their productivity.

I’m surprised these CEOs are as socially woke as they have all become. I’m not surprised, though, that when it comes to their own financial statements, they’re not picketing together with large placards saying “please raise my taxes.” And they’re not marching to raise not just their domestic income taxes, but also their capital gains taxes and their death taxes and their overseas taxes.

So I’m still looking for Secretary Yellen’s news event, but I don’t see it. Here’s what I do know. The Business Roundtable, which is home to the 200 largest companies in America, is opposed to the Biden-Yellen tax hikes at home and abroad. Opposed, Madam Secretary. Not crucially supporting, but opposed. And they’ve said so publically. Good for them. So I don’t know whom she’s talking about.

By the way — just for the heck of it — President Trump is now pouring it on. He’s warning Republicans not to raise taxes.

“Republicans in the U.S. Senate,” he said in a statement, “must not in any way shape or form increase taxes that were won in the Trump tax cut, the largest in the history of our country.”

Spot on, Mr. President. Stay on message.

And speaking of the Great Trump Tax Cut, the Congressional Budget Office and the Joint Committee on Taxation have priced out the Trump and Biden tax proposals. The Trump corporate tax cut was $350 billion dollars in lower revenues. The Biden corporate tax hike is estimated at $2.2. trillion dollars of increased revenues.

So in other words, the Biden tax hike is seven times as large as the Trump tax cut. Just think about that for a moment, please. It’s not just jumping the corporate rate from 21% to 28% where, it used to be 35%. Mr. Biden’s tax increase is seven times greater increase than the Trump tax cut. That’s serious business.

Plus, even though the Democrats have yet to put together a budget resolution and therefore they can’t form a reconciliation package — indeed the so-called infrastructure package completely lacks details on both the spending and pay-for sides — nonetheless, the desperate Dems are now talking about dynamic scoring.

I actually love this. For years, supply-siders like myself have argued that lower tax rates change economic behavior. Tax something less, you get more of it. We’ve always wanted this dynamic behavior to be included in the 10-year estimates of the economy, along with federal spending and revenues.

Otherwise in static terms, you could presumably raise the tax rate to 100% to get more revenue. Now it’s plain that a tax rate of 100% would destroy the economy, kill jobs, lose revenues, but that static approach held on institutionally for decades. Recently the CBO started using a watered down approach incorporating economic behavioral changes.

The Tax Foundation does a great job, as do some other models nowadays. So if the Democrats want to incorporate dynamic scoring into their $3 trillion package, or whatever size, I say fine.

They’re arguing that their social spending, so-called human infrastructure, universal preschool, free community college, child credits, dependent care would increase productivity and economic growth and hence revenues to reduce the deficit.

Color me skeptical, especially because their social spending is not tied to work incentives or work requirements, They kind of forgot the tax hike side, though. To quote the great Art Laffer “If you tax something more, you get less of it.” And less of it, means lower revenues and bigger deficits.

The Penn Wharton model has virtually the same numbers as the Tax Foundation and the NAM/Rice University model. All three models using dynamic scoring of Mr. Biden’s spending and tax proposals show roughly a 1% to 1.5% future decline of GDP, jobs, capital stock and productivity. In fact, the business roundtable is paying close attention to the Penn Wharton model.

So I hope Democrats understand what they’re getting into, because dynamic scoring is going to jack up their deficit numbers by lowering the economy and dropping revenues.

Incidentally, the $350 billion Trump corporate tax cut paid for itself in about 18 months because of stronger economic growth and lower unemployment and hence more taxable income throughout the economy at lower tax rates.

There was far less tax avoidance as huge volumes of overseas cash repatriation came flowing into Treasury coffers. The entire Trump tax cut priced at $1.5 trillion nearly paid for itself.

Just before the pandemic hit, CBO estimates only a $200 billion shortfall in revenues which would have been easily gobbled up had it not been for the virus.

That’s what lower tax rates do. They change behavior. People work more, invest more, and take more risks. Schumpeterian gales of creative destruction blow through the economy, opening the door to inventiveness, innovation, and advances in technology. Last weekend I communed with Joseph Schumpeter.

He passed away in 1950, but we periodically spiritually commune on the economy. And he told me, beware of the Biden tax hikes. He completely agrees with President Trump and does not understand Janet Yellen, though she had an excellent record at the Fed. It’s a reminder that you’re only as good as your last trade.


From Mr. Kudlow’s broadcast on Fox News.

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