Latest / Words & Numbers / Episode 411: Tax Cuts: The Good, the Bad, and the Irrelevant

Transcript

Episode 411: Tax Cuts: The Good, the Bad, and the Irrelevant · Words & Numbers

0:00
Hi, I'm James and I'm Anthony. And this is words and Numbers
0:08
brought to you by the good people at Calculus Center for
0:10
American Culture and Ideas and what's New and exciting year
0:14
world this week. I have a listener question, Joel
0:17
Stam wrote. I really enjoyed the recent
0:20
episode about Google getting charged Infinity dollars.
0:24
I have to ask, how in the world do you choose an appropriate
0:28
discount rate when doing present value calculations?
0:32
What he's going to say here I've exerienced as well.
0:34
As a student, I sat through hours of this stuff in my
0:37
undergrad classes, and whenever we were given homework problems
0:41
to work through, the discount rate was just provided as if it
0:44
were providentially from on high, miraculously calibrated
0:49
for just the answer the homework problem was looking for.
0:52
Well, that's right, but the discount rate for Infinity
0:54
dollars is always nonsensical. Well, the Infinity dollars is
0:58
nonsensical. Here's what's going on The
1:00
discount rate for those who aren't up on such things.
1:04
We covered this several episodes ago.
1:05
We talked about what was it, 26 trillion, septillion dollars,
1:10
whatever it was that the Russian court find Google discount rate
1:14
is the rate at which you regard future dollars as less valuable
1:20
than current dollars. And part of that is, well,
1:23
because of inflation, but part of it also is because if the
1:27
dollars are in the future, that means that you can't spend them
1:30
now. You have to wait till later.
1:32
And and we could all be dead by then.
1:34
And you could all be dead by then.
1:35
Exactly, right. There's all kinds of reasons why
1:38
you'd rather have the dollars now than later, and the rate at
1:42
which the dollars become less valuable to you the further into
1:47
the future they are. That's what we call the discount
1:49
rate. You see this thing, or a version
1:53
of it I should say, all the time, we call it the interest
1:56
rate. So suppose you have the
1:59
opportunity to put $100 in a savings account that pays, let's
2:03
say, 5% interest. So every year you get 5% on that
2:09
$100. If your response to that is, Oh
2:13
yes, I'd like to do that, I'll put my $100 in the bank and get
2:17
$5 a year in exchange, then your discount rate is less than 5%.
2:25
That is the fact that you have to wait to get your dollars back
2:29
is less painful to you because you're getting $5 a year
2:34
interest paid. On the other hand, if somebody
2:37
offers this and says, look, put $100 in the bank, we'll pay you
2:39
$5 a year and you say no way, I'd rather have the $100 now,
2:43
well then your discount rate is higher than the 5%.
2:47
Waiting isn't worth it to you. So basically speaking, that's
2:50
the discovery. It's a subjective thing, right?
2:52
Mine might be different than yours.
2:53
In fact, that's why some people borrow and some people lend.
2:58
I mean, think about it. If we all had the same discount
3:00
rate, then we'd all either be looking to borrow or we'd all be
3:05
looking to lend. The very reason that I aunt
3:08
might be willing to lend you James money and you, James, are
3:12
willing to pay interest to me is because you'd rather have the
3:15
money now and I would rather or have it later.
3:18
We have different discount rates.
3:20
I've asked. You for money repeatedly and you
3:22
never. Come through.
3:23
Yeah, that's because you missed that key footnote of you got to
3:26
pay it back. But so Joel asked this serious
3:31
question here. So where do you get this
3:33
discount rate for calculating these present value
3:35
calculations? And the answer is you can get it
3:38
by observing behavior, right? If it's an individual and you
3:42
say to me, look, put your $100 in the bank, I'll pay you 5%.
3:45
And I say, Nah, I'm not willing. You say, well, I'll pay you 6%.
3:49
And I said no, no, no, maybe, but no, I don't like it.
3:51
I'll pay you seven. OK, seven, I'll put it in the
3:53
bank. OK.
3:54
You just identified by discount rate, it's somewhere between
3:57
6:00 and 7%. And you can observe this with
4:00
companies. Typically you use what's called
4:02
the weighted average cost of capital.
4:04
That is how much interest does a company have to pay in order to
4:09
raise money? If it's a big safe company, it
4:13
has to pay less interest. If it's a small, risky company,
4:16
it has to pay more. But one thing that we do when we
4:19
use discount rates, as we say, well, what's your weighted
4:21
average cost of capital? That's a decent estimate of what
4:24
your company's discount rate is. Is that all?
4:27
That's all I got. That's the answer.
4:29
My eyes are starting to glaze over, so it must be time to move
4:33
on. You know, you talk about ChatGPT
4:36
a lot. And the one observation that
4:38
I've got, well, I mean, there might be others, but the real
4:41
issue with ChatGPT is that it's kind of a pain to use.
4:44
Oh my God, I was using it just today and it just freaked me
4:47
out. It's so horrible.
4:48
But what's your big? Problem.
4:50
My big problem, I'll tell you this, I wanted.
4:54
Boy, you got testy real fast, didn't you?
4:56
I was really annoyed. I wanted what's called the
5:00
Hirschmann Herfold index. It's a measure of industry
5:04
concentration and it measures basically, do you have one big
5:08
company or do you have a bunch of little ones and you can get
5:11
this. The Census Bureau or Bureau of
5:14
Labor Statistics calculates this for each of the 1000 some
5:19
industry classifications they have.
5:21
So I go, go to ChatGPT. I say, hey, can you find this
5:25
data for me? ChatGPT comes back and says, oh,
5:28
here it is. It's at this link and this link
5:30
and that link. I said no, no, no, no, go find
5:33
the data. It give it to me and ChatGPT
5:36
comes back and says, oh, I found the data.
5:38
It's at this link and this link and this link.
5:40
I said no. You put together a table with
5:44
the 1057 industry classifications, and on the next
5:48
column show me the number that goes with that industry.
5:52
So ChatGPT says OK, well, now I understand.
5:55
So it builds me a table. It's got 67 entries.
5:58
I said, hello, ChatGPT, how many entries are in this table?
6:02
It says 67. I said how many industry
6:04
classifications are there? It says, oh, there's 1057.
6:07
Wait a moment, let me put together a table, and it puts
6:09
together a table. It's the same 67, right?
6:12
So I'm thinking there's something wrong because it's
6:14
displaying on the screen. So I say, OK, OK, put it into an
6:18
Excel file that I can download. So it says no problem, put it
6:21
into the Excel file and I ask it before I download, how many
6:25
industries are in here? And I said, whoa, 1057.
6:27
So I download the thing. It's the same 67 industries.
6:30
I said, hello ChatGPT, you told me there's 1057.
6:34
There's only 67 in this file. And it says, oh, terribly sorry,
6:39
my mistake. Here's a fresh file that
6:41
contains the 1057. Right I click on it, it says
6:45
file not found. That all seems right.
6:49
And this for those of you listening out there, This is why
6:53
college students are failing by the truckload when they rely on
6:58
ChatGPT to cheat in their classes.
7:00
Oh, but I'm getting at a more basic thing.
7:03
I mean, it, it's just a pain to use.
7:06
Oh tell. Me.
7:06
What do you think? Well.
7:08
I got to go find it. I got to download it.
7:10
I have to have this stupid app that resides on my various
7:14
devices, and that's an impediment.
7:17
It's got to be integrated in order to be accepted and to work
7:21
well. And Apple has finally integrated
7:24
ChatGPT with its Siri feature. Oh, how's it really?
7:29
Yeah. So when you ask a question of
7:31
Siri, Siri will determine whether it's a simple question,
7:35
at which point Siri will answer your question, or a more complex
7:38
question which you'll punt over to ChatGPT behind the scenes
7:42
with you being numb, the wiser. This is about how things start
7:48
to get adopted worldwide, right? This is a big step.
7:52
OK. So we're almost to where I want
7:54
this thing. Is it the case?
7:55
Can you, as you could, I believe you could with IRI, ask it
7:59
what's on my calendar for today. I don't know.
8:02
I don't know how far down it's going to go.
8:04
I have a Mac, I have an iPad. I haven't gone and chased after
8:08
this yet. This will be something I'll try
8:11
next week and see how it works. But it's interesting to me that
8:14
finally you start to see this wholesale kind of integration.
8:19
Yeah. And this is a big step to making
8:22
this a workable technology. And that for me, that's the home
8:25
run when I can have the thing say, read my e-mail and it says
8:30
back to me, oh, so and so is asking for a meeting on such and
8:33
such a day. And I can say to it, check my
8:35
calendar if I'm available, send a reply saying OK that's what I
8:41
want. I don't expect that we're
8:43
anywhere close to that anytime soon, but I'll let you know if
8:47
we are. It'll be about this time next
8:50
week when I've got something else to say about it, I would
8:52
guess. But I want to go.
8:54
And for the foolishness of the week, back to one of my favorite
9:00
sites. Study finds.
9:01
We talk about this from time to time, and today I learned
9:06
something about general herpes that I never knew before.
9:12
Well, that came out of left field.
9:15
There's a sentence you weren't expecting.
9:17
How many people worldwide do you think have genital herpes?
9:21
I would guess worldwide I would be surprised if it's under 50%.
9:28
It is 846 million people. 846. Million million million people.
9:34
Somehow our friends at study finds gets that to say about
9:40
10%. Yeah.
9:41
No, no, no, they said about what was their what was their big
9:46
shocking headline. Their math was wrong.
9:48
It is about 10%, yeah. How?
9:51
On Earth, did we end up with 10% of the world's population having
9:56
herpes? I'm really surprised it's that
9:58
low. Of course not in the United
10:00
States. I'm picturing lesser developed
10:02
countries where I'm assuming it runs rampant.
10:04
Here's the math that caught my attention.
10:08
More than one in five people between the ages of 15 and 49.
10:12
OK. Here we go, yo-yo.
10:15
Wow, 20% from 18 to 49. Good God.
10:20
You know. It's not a mystery how we get
10:23
this. This is easily avoided.
10:26
It's kind of like when people talk endlessly about pregnancy
10:32
and abortion, never once bringing up the fact that we
10:36
have products on the market to get in the way of this process.
10:40
Yeah, but again, I'm going to come back to I bet you it varies
10:44
widely by country. Yeah, I don't give.
10:47
A You don't have to get this. There's an easy way around this.
10:53
I mean, come on, do I have to say it out loud?
10:57
But again, if you're talking about a lesser developed country
11:00
where not only do you have the problem of lesser healthcare,
11:02
lesser access to what you're talking about, but lesser
11:04
education about these things. I don't think there's much of
11:07
anybody in the world who doesn't know this much.
11:10
I mean, I look forward to being corrected on Mass by all of our
11:14
friends and followers when they all yell at me this week in the
11:17
hate mail. But sorry, this is beyond
11:20
stupid. This is the foolishness of the
11:22
week. Maybe the foolishness of the
11:24
month. But anyway, we've got a main
11:26
topic which might be equally or more foolish, so let's find out.
11:32
For One Stop shopping for all things James and Aunt, visit our
11:36
website wordsandnumbers.org. We give a special shout out to
11:41
our Patreon sponsors who help us keep the lights on.
11:45
If you'd like to contribute, go to patreon.com/words and
11:49
Numbers. I'm sorry, I'm too busy looking
11:53
up the numbers. I'm still on the herpes thing.
11:59
Let it go and we're done with the herpes thing.
12:01
Now let it go. I've got National Institutes of
12:04
Health here sense OK, I'm going to have to let that go.
12:08
First time for everything I'm. Sorry, what's our topic for
12:10
today? I.
12:13
Swear to God, man, I swear to God.
12:16
Yeah. Oh, this is where I say
12:17
something. Yes, yes, the Tax Cut in JOBS
12:21
Act this was one of the larger things that we got from the
12:27
Trump administration first time around.
12:30
And if you recall, there was people on one side of the
12:32
equation said, oh, this is good, it's going to be tax cuts.
12:35
And people on the other side of the equation said no, this is
12:38
just a giveaway because it's tax cuts for the rich.
12:41
But nonetheless the thing passed and when it passed, it had built
12:45
into it an automatic sunset. So if.
12:49
Let's hold the phone for just a second.
12:51
Remember how terrible it was? I mean, people were saying that
12:55
it would be the end of the universe.
12:57
And look, the budget deficit skyrocketed under Trump.
13:01
It absolutely skyrocketed. He showed no fiscal
13:05
responsibility whatsoever. But the Biden administration
13:10
came in, and they could have easily shut this down.
13:13
They didn't even try. Yeah, and I'll get into the
13:15
numbers in a minute. But while the deficit did
13:19
balloon under Trump, it did not balloon because our revenues
13:23
fell. It ballooned because spending,
13:25
as it always does. Right.
13:27
So whatever else is going on, the Tax Cuts and JOBS Act was
13:30
not responsible there. Well, I mean, look, I'm never
13:34
going to say a tax cut is responsible for our financial
13:37
straits, but if you owe tons of money, maybe you should think
13:43
about cutting spending and leaving revenue alone.
13:47
Right, right. But we didn't, and the Biden
13:49
administration came right in and let the whole thing just sail
13:53
right through. And now it's up to conclude in
13:56
2025. That's right, it's supposed to
13:58
sunset in 2025. So if Congress does nothing, the
14:01
tax code reverts to where it was in 2017.
14:05
If Congress takes action to extend it, then we keep it.
14:09
Which will mean, among other things, that 62% of people who
14:13
file will see a pretty significant tax increase.
14:16
Well. That's the first interesting
14:17
thing. If you look at the tax brackets
14:22
then you will see that the Tax Cuts in JOBS Act did indeed look
14:28
like a gift to the wealthy. That it's the high level tax
14:33
brackets that get cut and the low level tax brackets remain
14:37
the same. This is where you got this claim
14:39
that tax cut and JOBS Act as tax cuts for the rich.
14:42
But people say these are missing important thing, which is in
14:45
addition to the changes in the tax brackets, the Tax Cut and
14:49
JOBS Act doubled the standard deduction.
14:52
Which is quite impressive if you are on the lower end of the
14:57
income scale. Oh, it's quite.
14:58
Impressive if you're in the middle of the income scale,
15:01
yeah. That's right.
15:02
And let's be sure to point out the same thing that you and I
15:07
point out every single time we talk about the federal income
15:11
tax. When you take into account
15:15
everything, transfers and payments, 60% of the American
15:20
people do not pay income tax. Right.
15:22
They actually receive back more transfers and they pay in.
15:26
They get more out of the system than they pay in.
15:29
So what we're really looking at is a situation in which only the
15:34
pretty well off pay income tax at all.
15:37
Yeah, when you say things like, well, the rich should pay their
15:40
fair share, well, they're already paying all of it.
15:43
How much more than all do you want?
15:45
And that's, I think, a reasonable question to ask that
15:49
will never get answered. Kind of like, what percentage is
15:53
their fair share? No politician that will ever
15:56
stand up and say 87%. Of course, even Bernie Sanders
16:00
won't say that. I.
16:01
Have to put a big footnote here. First off, we're talking about
16:04
federal taxes, not state and local.
16:06
Second, this is income tax only, not payroll tax.
16:10
So Social Security, Medicare taxes aren't counted here.
16:14
And I think it's reasonable not to count them here because
16:19
really those are purchases of things.
16:22
You're purchasing in effect a pension through Social Security.
16:25
You're purchasing old age health insurance through Medicare, so
16:28
you're getting something back for that kind of one for one for
16:31
your dollars. For now.
16:33
Yeah, for now. But again, when people talk
16:36
about the rich paying their fair share, they're typically talking
16:40
specifically about the income tax.
16:42
And that's what we're talking about here, not payroll, just
16:44
income tax. Yeah, no, I think that's exactly
16:46
right. They're always talking about the
16:48
income tax and the corporate income tax.
16:51
And that's a separate issue, the corporate income tax, yeah, but
16:54
this is the personal income tax we're talking about.
16:57
We're on record as saying that the corporate income tax should
17:00
be 0 in every event. It should be 0, and I don't want
17:03
to take up this episode with that, but to fend off the hate
17:06
mail. My problem with the corporate
17:08
income tax has nothing to do with whether corporations are
17:12
are not paying. It has to do with the fact that
17:15
the corporate income tax is a handy way for politicians to
17:19
hide the fact that they're taxing people.
17:22
That's right, it's a very clear way to muddy the waters to make
17:27
it impossible to know how much you're actually paying in taxes,
17:31
because how much of your purchase ends up paying a tax.
17:36
Right. Yeah.
17:37
There's no way to know. And if you want an example of
17:40
this, if you've gone to Europe or talked to someone who's gone
17:43
to Europe, and often they come back and say, oh, it's great.
17:46
You just pay whatever the price tag says.
17:48
Nobody adds tax to the thing. Oh, no, the tax is in the price
17:52
tag. The difference is in the United
17:54
States, you know exactly what the sales tax is because it's
17:58
calculated separately and you see it in Europe, you don't know
18:01
what the sales tax is because it's built into the price.
18:04
That's what happens with corporate taxes in this country.
18:08
They get built into the price of the company's product and you
18:11
have no idea how much you're paying.
18:13
And you don't. And there's no way you ever
18:15
could. And politicians love this.
18:19
What they don't love is telling you what they think the income
18:23
tax rate should actually be. Yeah, that's a big thing.
18:26
You know, they don't want to answer the question, what is
18:28
fair? And so you never get beyond,
18:30
well, these people should pay more or these people should pay
18:33
less or whatever it is. And let me just state the
18:36
obvious. We often ask a question that
18:39
other people of our particular persuasion don't ask.
18:43
What do we owe each other as a cost to living in civil society?
18:48
And I don't know what the right answer is, but the right answer
18:51
is something near no more than 20%.
18:54
So situate that for me. Can you what percentage of us
18:59
pay more than that or less than that?
19:01
I mean, how does that sound 20%? Well, the. 20% tends to be the
19:05
number I point to as well, simply because I've got nothing
19:09
else to point to, and it's the number that keeps falling out of
19:14
the data. When you ask what fraction of
19:18
the economy does the federal government collect from all of
19:22
its taxes, Income, payroll, corporate, capital gains,
19:25
whatever, from all of its taxes, what slice of the economy does
19:28
the federal government collect? The answer is consistently 18% ±
19:33
2%. And it doesn't matter whether
19:35
you tax the rich or the poor or corporate operations or capital
19:37
gains or income or payroll, it's always 18%.
19:41
And so it seems to be the case that destined for whatever
19:44
reason for that to be the government's slice of the pie.
19:49
Well then the right answer is that appears to be what we owe
19:51
each other, 20%. And curiously, if you ask people
19:56
out of the clear blue what level of taxation they're perfectly
20:00
comfortable with. They almost always give an
20:02
answer between 15 and 20%. Yeah, people's at a gut level.
20:06
They tend to come back at that point.
20:08
Almost always so interestingly, our gut level intuition matches
20:14
what more or less what the government collects every year
20:17
anyway. And yet we still have this fair
20:22
share nonsense that we talk about all the time.
20:25
Why don't people realize that 20% of a lot is a lot more than
20:29
20% of a little? Well, and then here you get an
20:33
interesting situation. If indeed 20% or 18 percents,
20:38
that's the answer, that's what the government gets, then it
20:41
causes us or should cause us to think about tax policy questions
20:45
differently. As with the Tax Cut and JOBS
20:48
Act, rather than asking the question, will this enable the
20:52
government to collect more money or less money?
20:54
Or is it taxing the richer is taxing the poor, whatever it is?
20:57
Instead we should be asking the question, does it grow the
21:00
economic pie or shrink the economic pie because the
21:03
government is destined to get 18% of the pie.
21:07
So formulate your tax policy to make the pie as big as possible.
21:11
Right. And the tax spending should
21:14
never outpace the pot. No, now that's an entirely
21:17
different matter. I agree with you 100%, but
21:19
that's an entirely different matter now.
21:21
It is, but you have to come to terms with how we live, right?
21:25
That's important because we want lots of stuff for free, and
21:32
that's always going to yield the gigantic deficit, right?
21:36
Because we're going to get what we want until it all collapses
21:39
and we get nothing. And we do this, all of us.
21:43
You go to the store and you see something that you want and you
21:47
ask, can I afford it? Alternatively, what am I willing
21:50
to give up to get this thing? Those questions we tend not to
21:54
ask at a national level, but we have to.
21:58
We should be, because the government gets 18% of the pie.
22:01
That's all the money that there is.
22:03
And if you want more stuff than that, the government's going to
22:06
have to borrow. You know, I want all kinds of
22:08
stuff in it. Chief among that stuff, I want a
22:11
PlayStation Five. I've talked about this for a
22:15
year now. I still don't have one.
22:17
Why not? I can't justify the expense,
22:21
right? And that kind of thinking rules
22:25
each of our lives individually. And we can point to people who
22:28
seem to be missing that ability, but the vast majority of us live
22:34
exactly that way. We assess what we've got coming
22:37
in, responsibilities we've got going out and what's left over.
22:41
And that's how rational people live.
22:45
And sadly, that means I get to live without a PlayStation.
22:49
Well, so be it. What's next?
22:51
Okay, I've got heat, I've got electricity, I've got running
22:56
water, right? I've paid the mortgage, all
22:59
kinds of things. And yet nationally, we refuse to
23:03
take this approach. And there's a weird thing that
23:07
happens when these tax cuts are set to expire.
23:11
We're going to have a debate, and one side of that debate is
23:15
going to do great damage to the language and they're going to
23:18
say these tax cuts cost us X. No, they don't.
23:23
Tax cut never cost you a thing. Taxes cost individuals money.
23:29
That's the appropriate way to look at this.
23:32
And yet politicians will not do that.
23:34
Yeah, that language bothers me as well.
23:37
For the politician to say the tax cut cost the government, the
23:41
implication is that the money belongs to the government and
23:46
it's going to allow us to keep some of it.
23:49
That's exactly what it means, and people just accept that
23:53
without really thinking it through, you know?
23:56
Let me get back to the Tax Cut JOBS Act 'cause there's some
23:59
interesting things going on here.
24:01
So when this was instituted in 2018, of course, it reduced tax
24:06
rates, mostly at the higher income levels, but importantly
24:09
for low and middle income people, it doubled the
24:12
deduction, the standard deduction.
24:14
And this did a couple things. One is it took a bunch of money
24:19
off the table. I think the standard deduction
24:21
before was like 12,000 and change.
24:23
And with the tax cut, it became like 25,000.
24:26
So right off the bat, you can take $25,000 off the table and
24:30
the government's not going to tax that.
24:32
That's your standard deduction. That was one big deal.
24:35
The other big deal is related to that and that is a huge number
24:40
of Americans didn't need to itemize their taxes anymore
24:45
because the standard deduction was so large that you just take
24:48
the standard deduction. So all of that time and dealing
24:51
with the accountant or the tax guy and keeping your receipts
24:54
and all, all of that went away. You just take the standard
24:57
deduction and move on. Oh, and by the way, what that
25:00
meant was that particularly if you were lower middle class,
25:04
you're effective tax rate. So how much of your income
25:08
you're paying to the federal government after all the dust
25:11
settles basically cut in half. If you were paying 10% after all
25:16
the dust settles, you're now paying five, you're paying 12,
25:18
you're not paying 6. So to the detractors credit,
25:21
they are right, it is tax cuts for the rich, but it was also
25:25
tax cuts for the middle class and poor.
25:27
Well, not really for the poor so much because they weren't paying
25:30
taxes anyway. Well, that's not the case.
25:34
The lowest tax bracket kicked in immediately at 10%.
25:39
Yeah, but 60% of the American people don't pay anything.
25:42
Oh yeah, yeah, after accounting for transfers, right, you're
25:45
correct. I.
25:46
Don't think we should talk about taxes without accounting for
25:49
transfers too. I just think it does nobody any
25:52
good to casually omit that 60% of the American people are net
25:57
takers. Yeah.
25:58
And so let's remind listeners what transfers are.
26:02
Transfers are the opposite of taxes.
26:04
Rather than the government taking money from you, it's
26:06
giving you money. Now, some of this, and it's a
26:09
small portion, but some of this does fall under the heading of
26:12
welfare where the government will cut you a check for
26:15
whatever for low income people, this sort of thing, but a large
26:18
chunk of it is the earned income tax credit.
26:22
Well, I mean, how is that not welfare?
26:24
Well, we've decided that we want to help families with children.
26:27
This is how we go about doing it.
26:28
I don't have any problem with this as such.
26:32
Sounds like welfare well. Normally when you think of
26:34
welfare, you think of help specifically for the poor.
26:37
This isn't help for the poor, it's help for the middle class,
26:40
no. It's middle class, lower middle
26:42
class, working class. It's targeted to that group of
26:45
people. My problem with the earned
26:47
income tax credit is less than it exists than rather how it's
26:51
done. And the way it's done is you
26:55
fill out your tax form at the end of the year and you're doing
26:58
all the math and somewhere embedded in there is credit for
27:02
the earned income tax credit business.
27:04
And you finish all of your taxes.
27:06
And it says at the bottom, oh, you get a $500 refund.
27:10
And you would think, as any rational person would, oh, I've
27:15
paid too much to the government this year, I get $500 back, when
27:20
in fact, you may have actually paid less than the $500.
27:25
You pay $200.00 and you get $500 back.
27:28
So in other words, they're hiding the earned income tax
27:32
credit in all the calculations you go through.
27:34
So you're unaware that the government's actually giving you
27:38
money that you did not give it to begin with?
27:41
Yeah, no, there's a group of people, and it's not a small
27:43
group, but there's a group of people who literally turns a
27:46
profit when they fill out their taxes.
27:47
Oh, yes, right. Yeah.
27:49
This is not a matter of getting money back that you overpaid
27:53
over the year. It's a matter of getting more
27:55
back than you'll ever pay in a year.
27:57
Yeah. And you know, I'm not prepared
28:00
to say we shouldn't do that. What I am prepared to say is we
28:05
should A be above board about what we're doing so it's not
28:09
hidden, and B then ask a serious question.
28:12
Is it fair? Now maybe the answer is yes.
28:14
I've got no problem with the answer being yes.
28:17
But I want to ask the question after everything is crystal
28:20
clear, what we're doing. Do the American people think
28:23
this is fair? Yeah, I want to ask that
28:26
question to my knee jerk reaction.
28:29
My gut reaction is that no, this is never going to pass muster,
28:33
and the only thing that ever will is if we all know exactly
28:37
what the tax rate is. There's only one of them, and we
28:40
all pay it. And I'm OK with carving out a
28:43
deduction right so that we all pay 20% / 50,000 or whatever.
28:50
But I think there really should only be two questions that
28:53
politicians are allowed to answer.
28:55
What's tax rate? What's the standard deduction?
28:58
Yeah, if that's all they could do, there'd be a lot less
29:01
mischief. There'd be no mischief.
29:03
Part of the reason our tax code is multi hundreds of thousands
29:06
of pages long is because the politicians and special
29:11
interests both like it that way. They can hide what they're doing
29:15
in the tax code in such a way the rest of us can't see it.
29:19
But let me go back because I'm not done with the Tax Cut and
29:21
JOBS Act. So this was instituted in 2018.
29:24
It's supposed to sunset in 2025. And going to the question that
29:29
you raised earlier, what is this costing the federal government?
29:33
It turns out it's not costing much of anything.
29:36
In the five years prior to the Tax Cut and JOBS Act, the
29:41
government collected from personal income tax only an
29:46
amount equal to about 11% of the GDP, so 11% of the economy.
29:51
That's what the government collected in personal income tax
29:54
prior to the Tax Cut and JOBS Act.
29:57
In the five years since the Tax Cut and JOBS Act.
30:01
Oh, and by the way, I'm going to cut out 2020 here because of all
30:04
the COVID nonsense. But apart from COVID, in the
30:07
five years since the Tax Cut and JOBS Act, what fraction of GDP
30:11
has the government collected in personal income tax?
30:14
The answer is the exact same, 11%.
30:19
It's funny how these sorts of calculations keep happening,
30:23
yeah. Why is it 18% every year,
30:25
regardless of how they jigger up the rules?
30:28
Why is it 11% those five years versus these five years when the
30:33
rules were radically different? Yeah.
30:35
Why is it? I do not know, but it is.
30:38
Let me point out one other thing that's going on here.
30:41
You said in the last episode, you're absolutely right.
30:44
It's a fundamental truth of economics that you will get less
30:48
of anything you tax. And here when you tax income,
30:52
you're going to generate less income.
30:55
Specifically, you're going to give people a disincentive to
30:58
work. And I'm going to tread
31:00
cautiously here because there are lots of other things going
31:03
on at the same time. But the story I'm going to tell
31:05
you matches in the five years prior to the Tax Cut and JOBS
31:09
Act, when tax rates were higher, people were paying greater
31:12
portion of their income. The unemployment rate averaged
31:16
6% in the five years prior. In the five years after the Tax
31:20
Cut and JOBS Act, the unemployment rate averaged 4%,
31:24
again, ignoring the COVID year. It's not necessarily that one is
31:28
causing the other, but that is the consistent storage, the
31:31
story. We would expect that if you cut
31:34
the taxes, according to what we understand, the government
31:38
should get the same slice. But you take away the
31:41
disincentive to work, your unemployment rate goes down.
31:43
So the pie actually should be getting larger.
31:46
And 4% unemployment is a way better than 6%.
31:50
Way better, yeah. I mean, people think these are
31:53
small numbers. No, these are gigantic numbers.
31:57
Yeah. I mean, what's the human answer
31:59
here? How many more people are working
32:02
at 4% than at six? Oh, and I can tell you that
32:05
because our workforce is roughly 160 million people, I believe
32:10
that's correct. And A2 percentage point change,
32:14
you're talking 3 million, three million jobs. 3 million human
32:18
beings are doing better than they were otherwise, and as a
32:22
result, we're all doing better than we would have done
32:25
otherwise, right, because this rising tide lifts all boats Let.
32:29
Me close out my comments on the Tax Cut and JOBS Act by saying
32:33
I'm not advocating one way or the other if we leave the thing
32:37
alone at sunsets, if Congress takes action, it doesn't.
32:40
And I'm not advocating one way or the other.
32:41
But I am saying that the problem is more complex than the media
32:47
will make it out to be. This is not simply a matter of,
32:51
oh, let it expire because we have deficits.
32:53
The government needs to collect more money.
32:54
It's much, much more complicated than that.
32:57
And my prediction here is that this gets renewed without a
33:02
whole lot of difficulty. I think so.
33:05
You would think that way because of political forces.
33:07
This was a big piece of Trump's first administration.
33:11
It would be weird if in his second he allows it to sunset.
33:16
He's got slim majorities in Congress that are going to work
33:19
to make this happen. So I don't see a way around
33:22
that. I'm I'm happy to watch it happen
33:26
and get the answer in real time. But I think this one is pretty
33:29
clear. I don't see a way that this goes
33:31
away. And that's all the time we've
33:34
got this week on words and numbers.
33:36
Until next time. Send us e-mail
33:38
wordsandnumberspodcast@gmail.com. Try to be nice to one person who
33:43
doesn't deserve it till next week.
33:45
Can't take it easy, see? You next week, James.