A must read on how the White House’s proposals will affect us all

Trump-Style Policies Will Deepen the “American Carnage”

This is a must read because Taylor does a great job at providing empirical evidence as to how Trump’s policies may affect the population. The one thing this paper misses is the importance of the estate tax. And any discussion on income and wealth inequality is not complete with a detailed discussion on the estate tax. So I will provide a brief background on that.

But first, I must say that I am absolutely appalled (though after 6 months maybe I should stop being appalled by the administration by now…) to hear Paul Ryan and this administration seriously considering eliminating the estate tax. Research from all angles has proven that the estate tax is the best way to decrease wealth inequality. Raising taxes does not work because those with the highest incomes will simply lower their salaries from say $2m to $100k and pay themselves the difference in stock options or some other form of deferred payment (or simply use deductions).

Ok, if that’s the case, what about increasing the capital gains tax? Surely, the deferred income options will be sold at some point so we can raise the capital gains tax and collect that way. No, that does not work either because the wealthy can simply pass these assets to their heirs upon death tax free (if there is no estate tax). These assets then provide significant income and are passed down to future heirs over and over again (for the history buffs out there, this is what happened in feudal Europe). Over time the value of these assets grow larger and wealth inequality skyrockets. With an estate tax you can grab the tax of that original deferred salary (and any other assets that have been deferred) and use this money to fund education, infrastructure, etc (or, in the case of this administration, they can neglect basic necessities and build the military). Not to mention, has nobody else realized the Trump family will save billions of dollars by eliminating the estate tax? If this is NOT a conflict of interest, I don’t know what is.

Ok, scathing rant over. Back to the Taylor article. His model is interesting to me because he uses the three primary economic interventions this administration has been planning. They are:

  1. Reduce government spending on current and capital spending by $200 billion per year from a total of $3.2 trillion, decapitating discretionary outlays and boosting defense.
  2. Cut transfers (mostly Medicaid) by $200 billion from a total of $2.5 trillion.
  3. Remove taxes of $500 billion from a total of $700 billion for the top one percent and $200 billion for the middle class.

From this, comes evidence of significant wealth concentration over the next 40 years. The black line as the baseline with no changes, and the red line includes the 3 policy changes above.

taylor paper

Taylor then applied his distributive policies and a wealth fund. His policies are:

  1. 1.75%/year wage growth for the bottom 99% and 0% wage growth for the top 1%.
  2. A 1% annual decrease in the coefficient tying rich proprietors’ incomes to output.
  3. A  1% annual decrease in the coefficient relating financial transfers to the upper one percent to profits, i.e. firms invest more and distribute less.
  4. Placing a 50% tax on capital gains into a wealth fund and distribute 2% of its assets each year to households with low incomes.

The results from these policies are in stark contrast to the chart above.

taylor paper 2

I am typically not a fan of redistribution of assets. I believe that there are other less aggressive means. However, I have yet to come up with a better solution. I do know that wealth and income inequality is a serious issue. I can clearly envision a society whereby a single family owns all the land and property and increases rents every year to maximize their profits. This scenario is possible because over time rentiers will collect more cash. As they collect more cash they can purchase more properties. Over time they will not have a problem purchasing everything within a large radius. At this point the individuals living in that radius are doomed to pay a higher proportion of their income to rent and save less. The only option is move away (make your commute unreasonable) or get a new job. Both of which are not ideal.

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