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November
02
2017

The Can Kickers' Cacophony
David Stockman

They are kicking so many cans down there in the Imperial City that the endless din of clanking and banging is getting downright cacophonous. The last minute delay in the ballyhooed GOP tax bill, for example, is going to be a real racket maker because it's not just a one day delay----it's the start of a forever delay.

In a word, the GOP has lathered itself up in behalf of tax cuts costing $5.5 trillionover the next decade, but only had the (misguided) nerve to carve out a $1.5 trillionfree pass (deficit add-on) in its phony FY 2018 budget resolution. We will have more to say about this yawning $4 trillion gap below, but here's the crux of the matter.

Speaking for the GOP on both ends of Pennsylvania Avenue a month ago, the so-called Big Six framework included $3 trillion of business tax cuts alone. The latter featured three huge sugar plums eagerly sought on the K-Street/PAC corridors-----including the 20% corporate rate ($2.0 trillion), the 25% pass-thru rate for unincorporated businesses ($800 billion) and 100% first year expensing of equipment through 2022 ($200 billion).

But the GOP rank and file on Capitol Hill is just now hearing about the "payfors" and professes to be shocked(!) And unlike Captain Louis Renault in "Casablanca", no one is going to slip them some cash if they clear the waiting room at Gucci Gulch.

That's because any "payfors" that could make a dent in the $4 trillion hole are pure political poison. Thus, a true rollback of the 401 (k) deduction could save perhaps $500 billion over ten years, but would also trigger a massive withdrawal of campaign cash by Wall Street and the brokerage industry.

Likewise, eliminating the SALT (state and local tax) deduction entirely would save $1.3 trillion, but would send the real estate brokers, local business leaders and upper income GOP contributors into paroxysms of outrage.

So we are quite confident that most of the big "payfors" will be diluted and compromised down to a relative pittance---even before the tax bill gets out of the Ways and Means Committee.

For example, Chairman Brady has already thrown in the towel on the property tax piece of the SALT deduction, thereby cancelling $500 billion of the putative savings. And we are also quite confident that the $800 billion savings attributable to deep-sixing the sales and income tax deductions will be reduced at least by half when the committee votes for a "Pease" type cap on use of this deduction when taken by the wealthy.

In this regard, we keep hearing that there is so much at stake with the tax bill-----like retaining the House GOP majority----that this will be different than ObamaCare repeal and replace: The Republicans will come together out of sheer, desperate necessity.

Au contraire. The health care initiative failed due the political dumbbell stretching across the 239 GOP members of the House. The Freedom Caucus on the right wanted, appropriately, a lot more "free market" in the form of health insurance offers by providers and choices for consumers, while the RINOs (Republicans in name only) were scared to death politically to give up even small scraps of the "socialism" implicit in ObamaCare.

By contrast, on tax bill "payfors" there will be not a binary ideological divide, but 239 GOP political entrepreneurs fending for themselves. For example, catholic districts are not going to like for a moment the Big Six tradeoff between doubling the current $12,000 standard deduction (cost=$830 billion) versus eliminating the current $4,050 per dependent personal exemption (savings=$1.6 trillion).

Given the disproportion of the revenue gains versus loss, it's not hard to see why. In the case of a married couple with $75,000 of AGI and four kids, income tax payable under current law would amount to just $875, representing $4,875 of regular tax liability that would be off-set by $4,000 of child credits ($1,000 each under current law).

By contrast, the same household's regular tax liability under the Big Six framework would be $6,120 and after the current $4,000 child credit, it's actual payment would amount to $2,120 or 143% more!

What this means, therefore, is that the $800 billion gain from swapping the higher standard deduction for elimination of the dependent exemptions will raise taxes on large catholic families in order to pay for the corporate rate reduction!

Worse still, this giant gift to Wall Street will result in higher dividends and stock buybacks, not more domestic jobs and growth. That's because in a global labor market where the US is on the very high end of the cost curve, the corporate income tax is shifted to stockholders, not workers like claimed by the goofball (Kevin Hassett) of Dow 36,000 fame (by the year 2000!) who now heads the White House Council of Economic Advisors.

To be sure, that's why they have promised to substantially increase the child credit, but that would cost more big bucks and is perhaps the reason the dollar amount per child is one of the many features that have so far been left blank in the Big Six framework.

As it is, the current $1,000 credit will cost $525 billion (including refunds which are counted as outlays) over the next decade. So it is absolutely certain that $200-$300 billion more revenue loss will be needed to raise the  child credit toward $1500 per dependent; and considerable more that that if they accommodate even a token amount to fund Ivanka's crusade for more child care subsidies.

In short, you haven't seen nothing yet when it comes to the push-and-pull style free-for-all that is about to be unleashed in the U.S. House. The idea that they can shoehorn $5.5 trillion of tax cut aspirations----including the noisy demand of the farm and small business lobbies for repeal of the estate tax----into $1.5 trillion of deficit allowance and get it all done before thanksgiving is truly nuts.

Moreover, the idea that the GOP can pass a "middle class tax cut" is also way off base. That's because the middle class doesn't pay much income tax, and the 75 million households at the bottom half of the distribution pay virtually none at all.

In the case of the $75,000 per year family illustrated above, Federal income taxes due would amount to just 1.2% of AGI under current law and 2.8% under the Big Six framework. That is to say, the Federal income tax has morphed over the last three decades into a rich man's levy---with the top 6 million tax filers (or 4% out of 150 million) paying 60% of all income taxes collected by Uncle Sam.

So the GOP is barking up the wrong tree by presuming it's 1981 all over again and promising a Reaganesque cut for the middle class. You can't cut what isn't there.

What is really there, in fact, is $1.2 trillion per year of payroll taxes which would cost the above $75,000 household $11, 700 per year-----half of which would come out of the pay envelope and the other half would be charged to the employer, thereby reducing his capacity to fund cash wages or other benefits.

Yet even if they do succeeded in passing some watered down income tax cut in the House under the current time schedule, we doubt it will ever make it through the Senate and to the President's desk.

That's because the second kicked can will hit the wall on December 8th when the temporary CR for FY 2018 expires---along with the temporary "suspension" of the debt ceiling. In the longer run, this will be an even more cacophonous development since these deadlines will likely again be temporarily resolved via an exercise in "rinse and repeat".

Moreover, that will go on every several months as far as the eye can see. That's because there is flat-out no political will in the Imperial City to either permanently abolish the debt ceiling (which would be a catastrophe and guarantee Uncle Sam's eventual insolvency) or, in the alternative, to make meaningful cuts in entitlements and defense spending.

Indeed, the pathetic capitulation of the Freedom Caucus on the FY 2018 budget resolution last week is proof positive of the latter. To wit, the built in CBO spending baseline for the next decade is $53 trillion, and even that assumes abnormally low interest rates (relative to inflation) as far as the eye can see.

Yet the budget resolution did not provide for a reconciliation order to the standing committees for one single dime of savings over the next decade. And without reconciliation there will never be any budget reductions because entitlements, mandatories and interest on the soaring public debt comprise 75% of that $53 trillion baseline. That is, if the standing committees are not ordered to make reforms they do nothing, thereby permitting the doomsday machine to just roll on automatically and indefinitely.

Indeed, even in a shorter time frame, this giant cop-out will have grave consequences. No one in their right mind would expect a head-on assault on entitlements during the 2018 election year, and it does take several years of phase-in to fully capture any savings from such reforms.

So if by some miracle the Donald survives the Mueller assault, the GOP retains it majority in the bi-elections and the Republican party finally gets some serious fiscal gumption, it would still not be able to impact the deficit much before 2022. Yet by then, the baseline level of red ink by CBO's lights will be $1.o2 trillion per year or nearly $1.2 trillion with the tax cut add-on permitted under this year's budget resolution.

Nor can that dire prospect be mitigated by attacking the 25% part of the budget left over for so-called discretionary or appropriated programs. That's because upwards of $10 trillion of the $13.6 trillion baseline in this category is accounted for by national security, veterans, homeland security, border control and public infrastructure----all of which Trump and much of the Congressional GOP want to increase.

In short, the GOP is now in the midst of kicking the fiscal can right straight into a terminal crisis. Indeed, they have as much as admitted that in the implicit numbers in their phony FY 2018 budget resolution, which really wasn't a budget plan at all, but merely a de facto amendment to the Senate rules to circumvent the normal 60-vote rule on the tax bill.

Stated differently, none of the $5 trillion in deficit cuts in the GOP's budget resolution are real because none of them are subject to reconciliation. So the true fact of the case is that the GOP majorities on Capitol Hill have just passed a budget resolution which incorporates CBO's baseline deficit of $10.1 trillion over the next decade and adds $1.5 trillion more.

In turn, that computes out to a $32.2 trillion public debt by 2027 or 135% of GDP. And that assumes Rosy Scenario economics, too. Namely, that there will be no recession for 207 months thru 2027----a feat that is double the longest unbroken economic expansion in recorded history.

In this context, the Donald tweeted yesterday a giant tax cut is just around the corner:

The Republican House members are working hard (and late) toward the Massive Tax Cuts that they know you deserve. These will be biggest ever!

No they won't be!

What lies around the corner is an immense fiscal catastrophe. That's the inexorable result of the current cacophony of can-kicking in the Imperial City.

And as we shall address tomorrow, there is no chance that Jerome Powell or any other busload of central bankers can save the day. The monetary can has been kicked way too long, as well.

After all, the Fed again this month left the current 1.13% money market unchanged in a context in which the CPI has increased by 2.2% over the past year; and, even allowing for the recent oil and materials deflation, by 1.8% per annum since 2009.

That is to say, after 100 months of so-called business expansion we still have negative real interest rates.

Can our central bankers kick the can of negative real interest rates forever?

Needless to say, we will take the unders on that one until the cows come home.

 

 

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

 

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