MM#361--Taxes Have Consequences

0:07 Welcome to the Theory to Action podcast, where we examine the timeless treasures of wisdom from the great books in less time, to help you take action immediately and ultimately to create and lead a flourishing life. Now here's your host, david Kaiser. Hello, I am David and welcome back to another Mojo Minute Now, since we are just three weeks away from the 2024 presidential election. We have some folks telling some whopper of lies out there. We are going to wade back into our politics this week. I want to talk about the US economy and why it matters, and why the candidates' actual plans for the economy are, and why that is a big deal.

0:56 Because isn't the US economy just like any other economy? Well, in fact, that's not true economy. Well, in fact, that's not true. Our presidential candidates should be held to a very high level of giving details about their plans, because our economy is the greatest economy in the history of the world. This is one area where journalists and commentators should be peppering these candidates on their specific plans. The United States has the world's largest economy. It accounts for approximately one-fifth of global GDP. That sheer size means that any changes in the US economy have a substantial ripple effect across the world.

1:45 The US also accounts for a quarter of global GDP at market exchange rates, one-fifth of the global foreign direct investment and even more than a third of stock market capitalization. So all that means it's a very big deal. Furthermore, the United States is the largest export destination for one-fifth of the countries worldwide. Us multinationals have a significant presence abroad and foreign companies have substantial operations in the US. The US has free trade agreements with numerous countries, including a country to our north Canada to our south Mexico that's through the USMCA as well as free trade agreements, australia, south Korea and Israel, among others.

2:41 And we cannot forget the actual bond and equity markets. Those are the largest and most liquid in the world. The New York Stock Exchange and the NASDAQ are the world's largest two stock exchanges by market capitalization and even by trade volume. And, most importantly, the US dollar is the most widely used currency in global trade and in financial transactions. For that matter, it's the world's reserve currency. That's super important. The US dollar, the greenback, is the reserve currency for the world, is the reserve currency for the world, so that all of that means this is a huge, huge responsibility.

3:30 That's why the whole world is watching the United States and its presidential election. If we screw things up, if we get things wrong, the rest of the world knows they will suffer with us. And so I just found out. I just found it extremely rich, very rich over the weekend, as I saw former President Barack Obama lecturing us and his brothers about how Donald Trump had a growing and prosperous economy because of Barack Obama. What Police?

4:13 Yes, barack Obama is trying to make the argument his economy was so good that it carried over into Donald Trump's years in office. I mean, I have heard the former president tell some blatant lies, but boy, oh boy, holy smokes, holy smokes, jeez. Barack Obama's economy was in complete stagnation for eight long years. Most of us suffered through it. We remember it.

4:56 Now, to make this all very easy to understand, the US president, along with Congress, sets US tax policy. The Congress usually defers to the presidency to bring to the table his plan for the US economy. So, by law, those spending bills will start with US House of Representatives. Now, to make all this very, very simple because it's a little bit more complicated than this we're just going to talk about one pillar of the three pillars, the three main pillars or drivers of US economic policy. Those three pillars are tax policy, regulation policy and trade policy. And if we're going to put a percentage on each of these categories, how much do they actually influence the US economy?

5:42 Tax policy will account for 50%, so it's half of the accelerator or the breaking in the US economy, spending and regulation, 25%, another quarter of the economy and trade policy, another 25%, the remaining 25% and again, just to keep things simple. So, if you're looking at the equation, the most common question most people want to know is how do we get the economy going? Well, we have the data to show us exactly how to put our foot on the accelerator, and that data is wonderfully laid out in a very consequential book that almost no one will ever read because both parties are economically illiterate on all such matters.

6:34 That book is Taxes have Consequences, by Art Laffer, the great supply-side economist and the author of the infamous Laffer Curve. So let's in fact talk about Barack Obama's economy versus Donald Trump's economy. Let's go to the book. When Donald J Trump became president in 2017, american tax rates stood at high levels on two major counts. Rates were high in comparison both to recent American history and to two and two major countries worldwide.

7:14 The top individual income tax rate was 39.6%. This was the rate the Bill Clinton's tax increase law had put in place in 1993. From 2001 through 2012, through the George W Bush presidency, as well as the first Barack Obama term, the top individual rate was lower than this. It went down from 39.6% in the beginning of 2001 and held at 35% from 2003 through 2012. The top corporate income tax rate 35% from 1993 through 2017, was the highest in the developed world at the time Trump took office Among the 36 nations of the Organization for Economic Cooperation and Development, oecd.

8:09 As of 2017, the average top combined corporate rate in the United States, adding up to the maximum rate of 35% in the average state and local rates, was the highest, at a fraction of over 38%. France was the second, at 34%. Important trading partners were at 25% or lower. These included the United Kingdom, israel and Spain. The top combined corporate tax rate in Ireland, which, with its low rate, had become a global investment magnet, was the lowest in the OECD at all, of 12.5%.

8:55 As tax rates stayed at elevated levels in the United States through 2016 and into 2017, economic growth was distinctly mediocre. This was so in both comparative senses. This was so in both comparative senses. Growth was slow with respect to recent American history and concurrently with major nations abroad. As of 2017, the United States had failed to achieve a 3% economic growth for each of the previous dozen years. Let me repeat that again as of 2017, the United States had failed to achieve a year of 3% economic growth for each of the previous dozen years.

9:41 That's horrific. That's horrific. This was the first time this had ever happened in American history. Moreover, in 2016 and 17, the Eurozone rate of growth was faster than that of the United States. In 2016, while notoriously scleric, europe grew at about 2%, america grew at a bismal 1.75%, and when the Eurozone almost hit 2.5% in 2017, in came the United States at a fraction lower, at 2.25%. In the years in which Donald Trump won and then assumed office, american growth was bush league against its own precedent and brought up the rear against the old world.

10:34 So the easiest way to think about all these taxes is think about the fat man and thin man comparison. This is the old Bibi Netanyahu economic argument and why he grew the state of Israel so fast. That is now a global hub of innovation in high-tech industries. Now, as a brief aside, the average annual GDP rate for Israel over the past 25 years from 1999 to 2024? Approximately 3.76%. This indicates a strong and consistent economic expansion over those 25 years.

11:14 Several years, in fact, there was high growth rates, particularly high growth rates Year 2000,. 10% growth 2021, 8.6% growth 2022, 6.83% growth 2022, 6.83% growth. Israel's economic performance has been impressive when compared to even regional averages throughout the Middle East. No-transcript, just incredible growth and BB credits.

11:58 Supply-side economics, which the number one pillar of that policy is tax rate cuts and keeping domestic spending down. Now back to our US comparison. Let's check out some more important nuggets of economic wisdom from this wonderful book. You know, as an aside, this book Taxes have Consequences is just a hundred year romp through actual tax policy. The data you get in the weeds. Every presidential administration, every economic forecast, every tax cut bill you get into the weeds, and at a very high level.

12:46 It again proves the fact that we know tax cuts and supply-side economics works, because when it was tried in the 20s it worked. When it was tried under that was in Coolidge, under Coolidge, and then we fast forward. And when it was tried under Kennedy, it worked, and then we fast forward. And when it was tried under Kennedy, it worked, and then we fast forward. And when it was tried under Reagan it worked. Supply side economics works. It is not this voodoo economics that everybody talks about. We have the data. The data proves objectively that we know tax cuts work. It drives economic growth and everybody prospers from it.

13:26 So with that little diatribe, let's go back to the book to talk about economic growth. Typically, economic growth over the course of a long expansion is at first large and then moderate. This is so for statistical reasons. After a recession, the denominator of the GDP growth fraction is low. Growth over a year is the year's level of GDP divided by that of the previous year. If the previous year had a recession, the recovery year in which the economy is returning to normal operation stands to have a distinctly high growth rate.

14:07 The growth year and a year following years of economic recovery, in contrast, stands to be smaller. In the 30s, the 60s and the 80s, as well as the early 2000s, such a pattern held. Growth was strong as the recovery from recession took hold and then slowed as the expansion reached past three or four years. A quintessential example was the Ronald Reagan boom of 80 and 82. After the run of 5% to 6%, growth moderated to between 3% and 4% from 86, 87, 88, and 89.

14:57 The recovery from the severe Great Recession of 2008 and 2009 did not fit this pattern. Again, the recovery from the severe Great Recession of 2008-2009 did not fit this pattern. This is the last year of George W Bush Bush 43, and Barack Obama's first year Back to the book. Recovery out of the deep trough was slow and stayed that way. From 2010 through 2017, the most growth ever got to was 2.7% per year.

15:37 The average rate was 2%, distinctly lower than the regular growth rate of 3% for the whole 20th century. 2018 and 2019, however, the growth rate bumped up. The 2018 rate was 2.9%, the highest since the Great Recession. This is to compare the average size of the economy in 2018 with that of 2017. Comparing the size of the economy at the end of December 18 to that of December 17, growth was 3%, the first time that number had been touched since 2005. In 2019, growth came in at 2.3% higher than the average of Obama's years 2010 to 2017.

16:24 It was a unique sequence in American economic accounts. Eight years into an economic expansion a mediocre one for sure, that of 2010 to 2017, the Obama years economic growth then kicked up. This was so even though global economic growth was slowing down. Eurozone economic growth fell sharply after December of 2017, going from 2.5% to 1% and staying there. Under Obama, economic growth was sluggish in the United States and exceeding by that in Europe.

17:05 In the United States and exceeding by that in Europe After the Trump tax cut, growth was higher than Obama and beat that of Europe. So if the former president, barack Obama, to say that he has anything to do with the economic success of Donald Trump during his presidency, just a plain, flat-out lie. Just plain and simple, flat-out lie. Folks, what does that fact-checking website put out when it's a whopper of a lie? Oh, yes, yes, pants on fire lie. Pants on fire false claim. Yes, this is a pants on fire false claim.

17:47 In fact, it's more than that it's a double. It's a double or triple pants on fire false claim. Taxes do indeed have consequences, and we know how to get the economy going in the right direction. This book outlines it. You can read all 100 years of tax policy, from the 1920s to the 2020s, and we know how to beat inflation too, and how you do that is by growing the economy, and the number one way to grow the economy is with tax rates. Taxes have consequences, and good tax policy accounts for 50% of our economic makeup.

18:28 So in today's Mojo Minute, while you have candidates out there calling for this or that, one side wants to get the economy moving again. One side wants to kick the pants to this economy, and the way you do. That is to stimulate the supply side of the equation, and that is done with reducing and cutting marginal tax rates, plain and simple. That, indeed, will get the economy moving again, because taxes do have consequences. In fact, they have major, major consequences, and we need to get back to 3% to 4% growth again in this country, and that can't happen fast enough.

19:13 So keep fighting the good fight out there and let's pray that the candidate who cuts taxes wins. Thank you for joining us. The candidate who cuts taxes wins. Until next time, keep getting your mojo on.