Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, can I say something that I think is a
Speaker 2: little silly about US politics or US policymaking?
Speaker 3: What an intro? Joe? The answer is always so.
Speaker 2: I'm sure there's plenty of things about our US system
Speaker 2: of government that you know could be improved upon in theory,
Speaker 2: but I'm aware of that for various rules that exist
Speaker 2: in DC, we often pass these laws that just like expire,
Speaker 2: and I think it has something to do with I
Speaker 2: don't know, reconciliation and the deficit and the filibuster and
Speaker 2: all these things where you pass a law and it
Speaker 2: seems fine, and then if you don't do anything, it
Speaker 2: just goes away in ten years. It actually seems very
Speaker 2: hard to pass a law that has any sort of permanence,
Speaker 2: especially if it changes to government spending or taxation. It
Speaker 2: seems very hard to make permanent, substantial changes to our
Speaker 2: fiscal policy.
Speaker 3: I have to say, when you've mentioned it's been ten years,
Speaker 3: that's kind of amazing. So you are specifically talking about
Speaker 3: the twenty seventeen Tax Cut and Jobs Act, aka the
Speaker 3: Trump Tax Cuts. Those went into effect in twenty eighteen,
Speaker 3: and many of the cuts are scheduled to expire at
Speaker 3: the end of twenty twenty five. So by twenty twenty six,
Speaker 3: if we don't have any change, if we don't go about,
Speaker 3: you know, doing it all over again, then we could
Speaker 3: see tax increases.
Speaker 2: Right like currently. If nothing happens, if we were to
Speaker 2: get sort of gridlock after November, or just nothing happens,
Speaker 2: there is this tax hike that is existing lass as
Speaker 2: starting in twenty twenty six. I believe some taxes are
Speaker 2: going to go up. I don't know exactly what they are,
Speaker 2: well learn what they are, but yeah, right now we
Speaker 2: are on course for taxis Now. Every politician I think
Speaker 2: on either side of the aisle would probably say, at
Speaker 2: least for some constituency, some income groups, we don't want
Speaker 2: this to happen. We don't want taxes to go for
Speaker 2: Americans earning less than four hundred thousand dollars. That's something
Speaker 2: Democrats say from time to time, things like that. But
Speaker 2: it doesn't matter if every side doesn't want it to happen.
Speaker 2: You still need some sort of compromised law to replace
Speaker 2: the existing law, and there's no guarantee of that because
Speaker 2: politics is politics, and so as of right now, Yes,
Speaker 2: so it is a something for people to recognize. And
Speaker 2: b I think it's also important to understand what is
Speaker 2: the existing tax code, what did we change? Why did
Speaker 2: we have this change under the Trump administration find Dacga.
Speaker 3: Yeah, the process of actually designing tax policy really interesting
Speaker 3: and I have a lot of questions, and a lot
Speaker 3: of it stems from my first ever encounter with US taxes.
Speaker 3: I was living in London at the time, so I
Speaker 3: had to file things like the foreign earned income exclusion
Speaker 3: and stuff like that, and I remember receiving this like
Speaker 3: four hundred page book from the IRS on how to
Speaker 3: do your taxes, and it would say, like for box
Speaker 3: seventy eight, a turn to page three hundred and twenty eight,
Speaker 3: and I would turn to the page and there would
Speaker 3: be nothing there of relevance. And I remember sitting on
Speaker 3: the floor of my living room in London and crying
Speaker 3: over this paperwork and this like admin that I had
Speaker 3: to do. So America's tax system seems incredibly complicated to me.
Speaker 3: I don't even know how you start to make changes
Speaker 3: to it. And I am very interested to learn.
Speaker 2: Well, I'm happy to say we literally have the perfect
Speaker 2: guest because we're going to be speaking with the architect
Speaker 2: of the Tax Cut and Jobs Act, former Chairman of
Speaker 2: the Ways and Means Committee, Kevin Brady, the senior consultant
Speaker 2: now at a can Kevin Brady, Thank you so much
Speaker 2: for coming on Outlocks.
Speaker 4: Joe, Thanks for having me. This is exciting.
Speaker 2: We're really excited about this. Why don't we start at
Speaker 2: the you know, politicians come in, they say we're going
Speaker 2: to cut taxes. Right, We've heard it forever and Trump
Speaker 2: was no different in that respect. But there's a difference,
Speaker 2: I think maybe between saying we're going to cut taxes
Speaker 2: and the idea of comprehensive tax reform that effects both households,
Speaker 2: that affects corporations, et cetera. When you went you're considered
Speaker 2: to be the architect of the TCGA, when you went
Speaker 2: into this project of reforming the US tax code, which
Speaker 2: I believe was the first time the tax code was
Speaker 2: reformed in over thirty years. At bad point, these things
Speaker 2: do not come. The stars do not align often for this.
Speaker 2: What was your goal?
Speaker 4: Yeah, so our goal one? Again, Thanks for having me be.
Speaker 4: So the goal was pretty clear because we had a
Speaker 4: tax code that was was obsolete compared to the rest
Speaker 4: of the world on the way how businesses competed internationally.
Speaker 4: Our code was a relic from the Kennedy administration. If
Speaker 4: that part of the code were a person, it was
Speaker 4: eligible for AARP. And as result, other countries had passed
Speaker 4: us by their corporate rates were better. They were driving
Speaker 4: a modern tax car. You know, we had a whole
Speaker 4: old clunker. We're a big economy, but we couldn't keep up.
Speaker 4: So as a result of the highest corporate rate at
Speaker 4: the time in the world in the obsoste tax code,
Speaker 4: you know, we were falling behind. For a decade before
Speaker 4: twenty seventeen, growth was really slow in America one point
Speaker 4: five percent average GDP growth, way low. Paychecks were stagnant
Speaker 4: for the decade, and as you may recall, about every
Speaker 4: other month there was another US company picking up roots
Speaker 4: from the US and moving overseas or bought by a
Speaker 4: foreign company, even though we were the bigger factor there
Speaker 4: moving headquarters and employees overseas. So you know, we had
Speaker 4: to act ways and means. Committee Republicans actually worked eight
Speaker 4: years to be ready to do tax reform. And I've
Speaker 4: credit former Chairman Dave Camp from Michigan and Paul Ryan,
Speaker 4: who later became a speaker the work we did for
Speaker 4: all the time, ready for prepared for someone in the
Speaker 4: White House to lead on tax form, and that's what
Speaker 4: happened in twenty seventeen.
Speaker 3: So these type of tax changes, you know, going back
Speaker 3: to my earlier point about the complexity of the US
Speaker 3: tax system and maybe it's outdatedness as you put it,
Speaker 3: Does the ambition start at the policy level. Is it
Speaker 3: there are particular things in the code that we think
Speaker 3: are maybe stupid or irrelevant or old fashioned, and so
Speaker 3: we need to start focusing on those. Or does it
Speaker 3: start with a general desire to lower taxes or reform
Speaker 3: the system, and then you kind of work backwards to
Speaker 3: the individual policy level.
Speaker 4: So the answer is the big goals and then you
Speaker 4: work backwards. For example, we specifically wanted a tax code
Speaker 4: built for great growth, growth of jobs paychecks in the
Speaker 4: US economy. We wanted to redesign the international code so
Speaker 4: that it would leap frog America to among the most
Speaker 4: competitive economies, but we wanted to make sure we wanted
Speaker 4: to do it in a way where our US companies
Speaker 4: could compete and win anywhere in the world, including at home.
Speaker 4: When they did compete, win overseas, bring those dollars, make
Speaker 4: it easy for them to bring it back invest in
Speaker 4: the US. The old tax code said, no, don't do that.
Speaker 4: And we wanted to be to drive innovation because whatever
Speaker 4: country wins the innovation race really wins the future, I
Speaker 4: think economically. And we wanted to make America the most
Speaker 4: desirable place for that new plant, that new research, that
Speaker 4: new intellectual property. So those were the bigger goals, and
Speaker 4: then we wrote to those and one of the lessons
Speaker 4: we learned during the eight years as we laid out
Speaker 4: drafts of what we might do, is that we realized,
Speaker 4: especially in twenty seventeen, we had to go bold because
Speaker 4: we only get this only happens, as you said, Joe,
Speaker 4: once generation really and so you can't miss that opportunity.
Speaker 4: The other thing we learned is the boulder you go,
Speaker 4: the more people are willing to give up parts of
Speaker 4: the old tax code to drive a new, modern, faster,
Speaker 4: better performing tax vehicle going forward. So we took lessons
Speaker 4: we'd learned into the whole tax debate.
Speaker 2: I want to get in obviously to some of the
Speaker 2: philosophical questions and about the questions of what a pro
Speaker 2: growth tax system looks like. But before we do, what
Speaker 2: don't you just lay out the sort of bullet point
Speaker 2: versions of what the TCGA did and then what specifically
Speaker 2: is set to expire and would revert to in the
Speaker 2: next few years, because I know not some of it
Speaker 2: is actually permanent, like the corporate side is not going
Speaker 2: to change. But what do you just sort of give
Speaker 2: us the bullet points from twenty seventeen and what could reverse.
Speaker 4: Yeah, so it is different twenty twenty five than it
Speaker 4: was in twenty seventeen. So really the focus had to
Speaker 4: begin with growth, you know, because our economy was so slow,
Speaker 4: and competitiveness because we had fallen so far behind. So
Speaker 4: that's why focus was on dramatically reducing the corporate tax rate.
Speaker 4: Because to twenty one which really put us we were
Speaker 4: dead last. We moved into the middle of the pack.
Speaker 4: But the redesign of the international code made us very
Speaker 4: very competitive, and so twenty one percent puts us in
Speaker 4: the middle of the pack for our major foreign competitors
Speaker 4: at twenty one percent, and we could have gone lower
Speaker 4: in that regard. In fact President Trump wanted to go
Speaker 4: lower there, but what we thought that would perform very well,
Speaker 4: and it did. We lower taxes on individuals across the board.
Speaker 4: Our taxes were high, they had been growing since the
Speaker 4: Reagan tax cuts, and so our job was we believed
Speaker 4: if you give families, workers, and small businesses, you know,
Speaker 4: more control over their earnings one, you know, they get
Speaker 4: to live their dream not the government's stream, and omy
Speaker 4: is going to grow. And so we did some some
Speaker 4: big things. I think on the middle class tax cuts.
Speaker 4: We created the first ever small business tax deduction twenty
Speaker 4: percent for those what we call pass throughs. Those are
Speaker 4: the non corporations where the money gets paid by the individuals.
Speaker 2: You reduced the amount of state and local taxes that
Speaker 2: I can write off on my text.
Speaker 4: Thank you. Well, you're welcome. You're welcome. Happy to get
Speaker 4: out of New York as fast as I can. But yeah,
Speaker 4: can we talk about Solomon. Yeah, it's hard to ignore it.
Speaker 4: A lot of our listeners are very yeah, I know,
Speaker 4: so I should have come in under an assumed name.
Speaker 4: But you couldn't ignore Salt. It is the biggest single
Speaker 4: subsidy I think within individual tax code. It's worth a trillion,
Speaker 4: two trillion, five and we needed those dollars to pay
Speaker 4: for the small for the middle class tax cuts for
Speaker 4: the most part. But here's what we did. So we
Speaker 4: took a look at it. It wasn't a red blue
Speaker 4: thing at all. In fact, Texas is one of the
Speaker 4: bigger users of the salt deduction because of our properties,
Speaker 4: the proper each yeah, yeah, So what we looked at
Speaker 4: and we realized, you know, everyone's subsidizing everyone, you know,
Speaker 4: rural community cities, low and modest income, higher income, non itemizers, itemizers,
Speaker 4: and so we arrived at a simple premise, which is
Speaker 4: why doesn't everyone just pay their own state and local taxes?
Speaker 4: I mean, we choose where we work and we live.
Speaker 4: We have a choice in our elected officials. Why is
Speaker 4: anyone obligated to help us pay more importantly, why are
Speaker 4: we obligated to help pay others? Because half the salt
Speaker 4: deduction goes to households making a million dollars and more.
Speaker 4: So what we did was and then use that money
Speaker 4: to lower rates across the board. So take a deduction
Speaker 4: from some, give it to many more. At the end, though,
Speaker 4: you know, we compromise talking with the legislators and high
Speaker 4: tax states. You know, it was really important we preserve
Speaker 4: some of it. So we took the standard average standard
Speaker 4: deduction across America, which was five thousand, and we doubled it.
Speaker 4: But then we didn't stop there. So we took the
Speaker 4: child tax credit, which was was sort of limited about
Speaker 4: one hundred and twenty thousand. We took us up to
Speaker 4: four hundred thousand, provide more tax relief for people who
Speaker 4: were impacted by salt. Then we did away with the
Speaker 4: AMT Alternative minimum tax. Again that's what how people couldn't
Speaker 4: get like in New York, New Jersey couldn't even use
Speaker 4: the salt tax deduction even those in place. Then we
Speaker 4: changed the marginal tax rates all to make we want
Speaker 4: lower taxes in every state, not red states, not every state.
Speaker 4: And so we made big changes to make sure we
Speaker 4: saw those tax cuts. And I know most people look
Speaker 4: at it and say, look, we just need to restore that.
Speaker 4: And I wouldn't be surprised if there's some give on that,
Speaker 4: because we've got we've got in our party as well.
Speaker 4: You know, we've got New Yorkers and New Jerseys, California's Illinois,
Speaker 4: you know, Minnesota, Long Island Republic. Yeah, so look, that's fair.
Speaker 4: It's important to them, and so I think there's there's
Speaker 4: some prett good discus sessions. I think you might see
Speaker 4: some relief. But here's the warning. It's really expensive. Yeah,
Speaker 4: and every dollar comes out of those middle class tax cuts.
Speaker 4: So whatever you give there, you know, you got to
Speaker 4: figure out where to pick it up somewhere else.
Speaker 3: Yeah, plenty of people still feel salty about salt. Myself
Speaker 3: included full disclosure. Okay, this reminds me, though. One thing
Speaker 3: I always wanted to ask about these is did you
Speaker 3: have a particular tax model in mind when you started
Speaker 3: this process. Did you look at potentially other countries and say,
Speaker 3: they're doing this right or they're doing this wrong. Or
Speaker 3: is it the case that because of the uniqueness of
Speaker 3: the US tax system there are no international comparisons that
Speaker 3: you can really make.
Speaker 4: There are tons of international comparisons.
Speaker 3: Okay, good.
Speaker 4: We spent a lot of time both the way they
Speaker 4: tax businesses that compete around the world and the way
Speaker 4: they tax themselves, and obviously we're out of step, especially
Speaker 4: on the international side. No very few other countries taxed
Speaker 4: you at home and taxed your business. Odd they taxed
Speaker 4: you at home, but we were doing both, and it
Speaker 4: was a problem. A lot of countries have value added taxes,
Speaker 4: you know, that add more revenue beyond their income taxes.
Speaker 4: We're well aware of that. But I'm going to tell
Speaker 4: you what was driving this as a model, and you're
Speaker 4: going to laugh at first, but let me explain it
Speaker 4: to you. So and why we did it. So you
Speaker 4: heard us talk about getting ninety percent of Americans to
Speaker 4: be able to file on the back of a postcard,
Speaker 4: and you probably said that is a political gimmick, but
Speaker 4: in fact, that was driving our goal of simplifying the
Speaker 4: tax code dramatically, so getting rid of a lot of
Speaker 4: that complexity for some, lowering the rates for everybody, and
Speaker 4: creating more fairness and understanding of how we tax people.
Speaker 4: And our thinking was look for again, there's people who
Speaker 4: would never be able to do that, but for a
Speaker 4: lot of Americans, you know, there is something powerful about
Speaker 4: looking at thirteen lines and saying, this is how I'm taxed.
Speaker 4: In almost all the neighbors that I can see, this
Speaker 4: is how they're tax too. And it also makes it
Speaker 4: harder for Washington to raise taxes because you actually know,
Speaker 4: you know what I mean, how you are being taxed.
Speaker 4: So the postcard drove what we hoped would be simplicity, fairness,
Speaker 4: obviously stronger growth as well. And on the business side,
Speaker 4: you know, our first proposal, which didn't make it all
Speaker 4: the way through, was to basically eliminate huge chunks of
Speaker 4: the international code and replace it with a border adjustment tax,
Speaker 4: which is basically a consumption tax that asks a simple question,
Speaker 4: do you sell your product or service in America? If so,
Speaker 4: everyone's paying the same rate. It doesn't matter where it
Speaker 4: was made, doesn't matter where it's shipped from, doesn't matter
Speaker 4: who did it. Are you selling it here? If so,
Speaker 4: if you're US or you're from France, you're paying the
Speaker 4: same rate. And so we thought, well, in the the
Speaker 4: other big virtue of it is that for American companies,
Speaker 4: you took that tax off of products you're exporting and selling,
Speaker 4: you put it on those coming in. So now we're
Speaker 4: more competitive compared to the vat around the world. And
Speaker 4: the simplicity of it it was bold. I still think it's,
Speaker 4: you know, an incredibly positive approach on taxes, but we
Speaker 4: had a short runway to get all this done. You know,
Speaker 4: industries that that that import a lot, whether you're a
Speaker 4: Walmart or a refiner or an Apple or whatever. You know,
Speaker 4: they have real objections to it. We didn't have time
Speaker 4: to be able to sit through and work, and so
Speaker 4: at one point we had to jettison what was one
Speaker 4: of the bolder I think more were positive things. But
Speaker 4: that's the process, you know, Tracy, you're asking about. It's
Speaker 4: you do. No matter what your dreams are, you got
Speaker 4: to get it through Congress.
Speaker 3: So tell us more about that process. What are conversations
Speaker 3: actually like are you all in a room together, like
Speaker 3: yelling at each other? Are there, you know, phone calls
Speaker 3: at midnight, that kind of thing.
Speaker 4: So because we started so early, you know, it was
Speaker 4: just a continual series of meetings, listening sessions, discussions with
Speaker 4: the scorekeepers like Joint Committee on Taxation, Congressional Budget.
Speaker 3: I'm going to ask you about that.
Speaker 4: Yeah, you got to figure out you got to turn
Speaker 4: the Rubik's cube to figure out, Okay, if we do
Speaker 4: this and this, what do you get, Like what kind
Speaker 4: of growth and who pays the taxes and what's the
Speaker 4: cost of all that? And so we had a long
Speaker 4: time to run through countless meetings, briefings, bring an ex person,
Speaker 4: all that. But in twenty seventeen is we really started
Speaker 4: to get crunch time. All of that accelerated, and so
Speaker 4: we certainly in the House, we started with this premise
Speaker 4: and we went to our House members and said, look,
Speaker 4: we're going to tear the tax code down to its
Speaker 4: foundation and we're going to rebuild it. So go back
Speaker 4: home and listen to what people what's important in twenty seventeen,
Speaker 4: not the nineteen eighties, like what is important to you,
Speaker 4: and then we rebuilt it from that. And so lots
Speaker 4: lots of meetings, a lot of listening sessions late into
Speaker 4: the night. We had the Ways and Means Committee members working.
Speaker 4: We brought them back for holidays, you had them work
Speaker 4: when everyone was on recess. A lot of it was
Speaker 4: listening because to other members in briefing groups from DC
Speaker 4: and around the country. Even though we didn't get Democrats support,
Speaker 4: you know, I briefed our Ways and Means Democrats, our
Speaker 4: new Democrats, our problem solvers, the trade the unions sat
Speaker 4: down with them. We knew, I knew they weren't going
Speaker 4: to be able to support this. If I wanted to
Speaker 4: hear what was important to them to figure out what
Speaker 4: might be the biparson areas that we can design too,
Speaker 4: and it was all that was hugely helpful. But the
Speaker 4: process you're working with, the Senate, the White House, constant
Speaker 4: media presence, lots of groups attacking or supporting. It's sort
Speaker 4: of a hurricane, you know what I mean of input.
Speaker 4: As you're doing that.
Speaker 2: I'm going to ask you a kind of political question.
Speaker 2: You can be as forthcoming as you would like to
Speaker 2: be on this question. But there's obviously a possibility that
Speaker 2: you know, Trump wins in November, and he says things
Speaker 2: in the media that I think probably people in DC
Speaker 2: like wonder, like how serious is he? So, you know,
Speaker 2: like and some things he says seem like quite ball.
Speaker 4: You know.
Speaker 2: He says he's talked on the campaign trail this time
Speaker 2: no taxes on tipped income, I think he said last
Speaker 2: night or recording the September twenty sixth, He's like, no,
Speaker 2: we're just not going to tax us manufacturers. He says
Speaker 2: some things that are more make economists very nervous, such
Speaker 2: as massively increasing tariffs would our attacks. And he says
Speaker 2: things that make people even more head scratched, such as, oh,
Speaker 2: maybe we could create a thirty five trillion dollar crypto
Speaker 2: client and pay off the deficit. So what I want
Speaker 2: to ask you is, from the perspective of a someone
Speaker 2: writing policy, how should people think about what he says
Speaker 2: publicly and translating this or taking it seriously? How seriously
Speaker 2: should we tell you?
Speaker 4: What do you tell us? How we should? Yeah?
Speaker 2: And then how these things maybe get molded into something real.
Speaker 4: Having experienced working with the President both on healthcare, tax
Speaker 4: reform and in trade to some degree so that every
Speaker 4: day the press in the Capitol would ask me about
Speaker 4: the president's latest tweet, I always did, but I didn't
Speaker 4: pay attention to his tweets. I paid attention to his
Speaker 4: campaign promises because I've never seen someone in the White
Speaker 4: House so focused on this is what I said, we do?
Speaker 4: Have you done it? Because it matters to him? But
Speaker 4: the flip side of that was, you know, he was
Speaker 4: not wed to doing exactly that. So my advice always
Speaker 4: is take him seriously, but not literally, because whether you're
Speaker 4: working on taxes or trade, whatever, man, he's opened lots
Speaker 4: of changes. He's listening to sort of that team of
Speaker 4: rivals discussion. You can shape, and we did in tax
Speaker 4: from shape a lot of what were campaign promises into
Speaker 4: positive things, but not exactly.
Speaker 2: I just one follow up on this one thing that
Speaker 2: he does not if a future Trump presidency does not
Speaker 2: really need the help of Congress on would be terrorists. Yeah,
Speaker 2: and he's talking. He he to your point. He followed
Speaker 2: through with his terror promises from the twenty sixteen election,
Speaker 2: and in the twenty twenty four election he has much bigger,
Speaker 2: terarff promises. And I have to imagine that you know
Speaker 2: a lot of people, particularly in DC, who are like
Speaker 2: deeply uncomfortable about this, particularly corporate anyone who trades internationally,
Speaker 2: et cetera. What are you telling them about the risk
Speaker 2: of a very different international trading regime unto the next president.
Speaker 4: Yes. So I'm not a fan of tariffs. I think
Speaker 4: they're incredibly damaging. You punishes America more than whoever we're
Speaker 4: trying to punish, And yeah, it is. I don't advise
Speaker 4: any president to go that route unless there is some
Speaker 4: very specific target you need to hit. But what I
Speaker 4: advise them in using the experience of his first term
Speaker 4: is same thing. Take him he's going to use tariffs
Speaker 4: for a purpose, if not imposing them, sort of hammering
Speaker 4: people into coming to the table on issues. I think
Speaker 4: that's he uses that threat fairly effectively. It is disruptive.
Speaker 4: I did have an impact on economic growth. There's no quote,
Speaker 4: both the threat of withdrawing from NAFTA, for example, the
Speaker 4: major threats with the steel aluminum filed through on in China.
Speaker 4: There's no question it slowed growth and had an impact,
Speaker 4: and so would future terror. My advice is again, take
Speaker 4: them seriously. He likes Tarff's believes that levels the playing field,
Speaker 4: and he's held that belief since eighties, but that he
Speaker 4: also listens to the economic impact. You know, he's proud
Speaker 4: of his economy and he's open to arguments of how
Speaker 4: this hurts the very people he's trying to help.
Speaker 3: Since you mentioned economic growth, how do you judge the
Speaker 3: success of something like the tax cuts, because you know,
Speaker 3: I'm aware there's a controversy right now over dynamic analysis
Speaker 3: or modeling, and it does seem hard to disentangle the
Speaker 3: cuts from other factors. So I'm and it does feel like,
Speaker 3: you know, you can kind of say like, oh, well
Speaker 3: the tax cuts did this, but then you can argue, well,
Speaker 3: there are other things going on and that's why growth
Speaker 3: went up. So how do you kind of evaluate the
Speaker 3: actual impact.
Speaker 4: Yeah, as you know, there's lots of projections ahead of
Speaker 4: tax reform in the economy, there's lots of different data
Speaker 4: on it. We try we try to use the government
Speaker 4: data as much as possible, you know, and we supplement
Speaker 4: it with lots of other studies and different groups that
Speaker 4: those are all very helpful, but we tend to rely
Speaker 4: on so what do the numbers show us? And yes,
Speaker 4: there are always other factors. I think the relief on
Speaker 4: regulation played a pretty important part, I think in the
Speaker 4: economy overall, and you just have the economy in general.
Speaker 4: So we were always taking a look at how much
Speaker 4: did it grow jobs, how much money returned from overseas
Speaker 4: two and a half trillion, you know, we had innovations
Speaker 4: to do your intellectual property in America, we'll bring it back.
Speaker 4: Those revenues doubled, really good outcome there. Investment from businesses,
Speaker 4: big thing that drives, that drives, equipment that drives all
Speaker 4: this stuff on average went up twenty percent, really good numbers.
Speaker 4: Research did the exact same thing, and so watching the
Speaker 4: economic data, we were achieving much of what we had
Speaker 4: hoped for. The the one element. Twenty nineteen to me
Speaker 4: was the most fascinating year. We watched it closely. Because
Speaker 4: the code had been in place one year now we
Speaker 4: could sort of see how it was working. And we
Speaker 4: know generally how an individual, like a corporate rate cut
Speaker 4: or research and development, how it will perform. Generally, the
Speaker 4: question is how does it all interact, you know what
Speaker 4: I mean, like, how does that it's like a Formula
Speaker 4: one car and bring an upgrade? How does it affect
Speaker 4: the rest of the performance. And so that's what I
Speaker 4: was following twenty nineteen. Couple key things happened, I think
Speaker 4: besides very strong economic growth. One, real wages and like
Speaker 4: a head of inflation grew more in one year than
Speaker 4: in the eight years combined before it. In fact, those
Speaker 4: first three years after TCJA, real wages average nine percent.
Speaker 4: That's the best three years on record. So paychecks were growing.
Speaker 4: We checked the box that was working really well. Poverty,
Speaker 4: you know, twenty nineteen just plummeted in a good way,
Speaker 4: but it did the most, made the most progress among
Speaker 4: the people who'd sort of been left behind, people of color,
Speaker 4: those without a high school degree, disabled, young folks got
Speaker 4: new opportunities. That was that was what we were driving for.
Speaker 4: And then income inequality began to strength for the first
Speaker 4: time in fifty years. According to Larry Lindsay, fed Governor
Speaker 4: and in the White House Economic Team, another goal of
Speaker 4: ours and so yeah, we were every year tracking what
Speaker 4: progress we were making and what provisions might not be
Speaker 4: performing as well as you want.
Speaker 2: You mentioned income inequality. I'm curious your philosophy about the
Speaker 2: role of progressivity in the tax cuts. We obviously have
Speaker 2: a progressive income tax, and the more you make, the
Speaker 2: higher percentage of your marginal in a higher marginal tax
Speaker 2: goes up. A criticism that you get of tax cuts
Speaker 2: is like a lot of the tax cuts benefit the rich,
Speaker 2: but of course the rich pay a lot of taxes,
Speaker 2: so if you're relative to the poor, So if you're
Speaker 2: going to cut taxes, we all know like a net
Speaker 2: where those dollars are going to flow. But just talk
Speaker 2: to us about your philosophy of the role that the
Speaker 2: tax code can play in the TCGA or just generally
Speaker 2: and thinking about the importance or unimportance if that's your
Speaker 2: view of progressivity in the tax code.
Speaker 4: Yeah, so, I don't think people realize how progressive our
Speaker 4: code is compared to other countries. If you just look
Speaker 4: at like what is the top rate, you might say, well,
Speaker 4: it's more in France or somewhere else. But if you
Speaker 4: look at what's the share of taxes that each income
Speaker 4: group pays, we are incredibly progressive. In the top one
Speaker 4: percent in America today shoulder about forty five percent of
Speaker 4: all the income tax burdens. That's unusually high for it.
Speaker 4: And the converse is true as well, Like the bottom
Speaker 4: half of income earners. What we would think is up
Speaker 4: to the middle class shoulder only about a little more
Speaker 4: than two percent of the whole income tax burden. So
Speaker 4: and it grew after the tax reform. It grew a
Speaker 4: quarter for the wealthy, they picked up a bigger burden.
Speaker 4: It's shrunk by a quarter for the modest and low
Speaker 4: income down to two point three percent. So we are
Speaker 4: people are always surprised how progressive we are compared to
Speaker 4: other countries.
Speaker 2: Real quickly, and before we forget to do this, can
Speaker 2: you give us the bullet point in summary of what happened. Okay,
Speaker 2: let's say twenty twenty election, twenty twenty four election happens.
Speaker 2: It's political gridlock. They can agree on nothing in DC,
Speaker 2: what reverts and what doesn't.
Speaker 4: Yeah, so twenty seventeen is all about growth. Competitiveness twenty
Speaker 4: twenty five is going to be about the individual tax cuts.
Speaker 4: Do they hang around? And so all the individual marginal
Speaker 4: rates revert back to pre twenty seventeen. Those are an
Speaker 4: average family for it's gonna be around two thousand dollars roughly.
Speaker 4: Things like the child tax credit is going to shrink back.
Speaker 4: The standard deduction, which we nearly doubled, hugely popular, and
Speaker 4: now ninety percent of Americans don't have to itemize their time.
Speaker 4: They sort of love that. That reverts as well. The
Speaker 4: small business tax cuts we created goes away. That's really damaging,
Speaker 4: I think in a big way. And then things like
Speaker 4: the estate tax, what we call the death tax family
Speaker 4: farms and businesses, goes back to very few exceptions in
Speaker 4: a much higher rate. Things like opportunity zones disappear. The
Speaker 4: new we create a new child or a tax credit
Speaker 4: for paid family and medical leave, so businesses that created
Speaker 4: those programs tailored to their workers could get some help
Speaker 4: doing it goes away as well. And in some business credits,
Speaker 4: really important research and development expensing, expensing of your equipment, software,
Speaker 4: all of that reverts to a very I think negative
Speaker 4: position there. So yeah, for trillion or more of tax
Speaker 4: heights that it'll slam the economy, and neither party I
Speaker 4: think has anything to win by letting these expire, which
Speaker 4: is where why you asked why something's expiring sometime. So
Speaker 4: I'm not going to just blame it on Senate budget rules,
Speaker 4: but I'm going to blame it on Centate Budger because
Speaker 4: that's what did it. But our thinking was we locked
Speaker 4: in all the growth competitives because so important on paychecks
Speaker 4: and jobs. We left the more biparson issues We believed
Speaker 4: Republican Democrats would want to keep, the middle class tax cuts,
Speaker 4: the small business tax cuts, the child tax credit, issues
Speaker 4: like that, where I think they'll be more common ground
Speaker 4: heading into twenty twenty five.
Speaker 3: I want to go back to the inequality discussion because
Speaker 3: I take the point about progressivism and the idea that
Speaker 3: they're wealthy in America are paying more taxes overall. But
Speaker 3: my impression is the more redistributionist countries that are out there,
Speaker 3: I guess they don't necessarily have really progressive taxes, but
Speaker 3: the difference is that the tax that they get they
Speaker 3: direct more towards the poor. So I guess my question is,
Speaker 3: could we reduce inequality through something other than taxation. Could
Speaker 3: we just spend in a different way in order to.
Speaker 4: Focused with yeah, exactly, you know, perhaps, but we have
Speaker 4: a pretty poor track record of that unfortunately, within our
Speaker 4: spending and the government or of that social safety net.
Speaker 4: You know, I think we're all really cognizant of you know,
Speaker 4: we often discourage work in connecting back to the workforce
Speaker 4: in a lot of those when you put all that
Speaker 4: net together on average, you know, in a state like Texas,
Speaker 4: or that family, whether it's single mom or with a
Speaker 4: couple children, you know, those benefits start to add up.
Speaker 4: Like in Texas, we're a little stingy on all that.
Speaker 4: It's still close to fifty thousand dollars a year. In
Speaker 4: a Pennsylvania it'll be sixty seven sixty some thousand. So
Speaker 4: the problem is is that you make it really hard
Speaker 4: for people to move off out of the social safety net.
Speaker 4: It's not in their interest to do it, or it
Speaker 4: doesn't feel that way for them. And so part of
Speaker 4: our thinking again on the tax code was let's reward work,
Speaker 4: you know what I mean, in a way that allows
Speaker 4: them and encourages them to move back into the workforce.
Speaker 4: That happened in TCJA certainly not to the level we
Speaker 4: will need for the long term. And COVID changed everything
Speaker 4: sort of on labor participation in just change the game
Speaker 4: that way.
Speaker 2: So one of the criticisms of the current I don't
Speaker 2: know current tax code is people talk about this phenomenon
Speaker 2: of by borrow die wealthy people accumulate assets rather than
Speaker 2: sell them. When they go up to enjoy the fruits
Speaker 2: of their increased wealth, they borrow against them, and that
Speaker 2: borrowing is tax free, and then they spend that and
Speaker 2: then assets tend to go up like stocks over time,
Speaker 2: and then they die and then their bequeath to their children,
Speaker 2: and the children get a step up in basis such
Speaker 2: that they don't actually pay capital gains on the original
Speaker 2: purchase of the real estate or the stock or whatever.
Speaker 2: And so one thing that was for about a week
Speaker 2: people were talking about it was like, well, maybe we
Speaker 2: should have some sort of tax on unrealized capital gains.
Speaker 2: Seems very unlikely to me for all kinds of reasons.
Speaker 2: But setting that aside, are there still issues out there
Speaker 2: that seem structurally wrong, such as step up and basis
Speaker 2: and some of these other ways that the wealthy can
Speaker 2: accumulate assets without having a big tax bill before realizing
Speaker 2: their benefit.
Speaker 4: Yeah, you know, I actually don't see that as an
Speaker 4: abuse in the sense that you know, we do that
Speaker 4: in our home equity loans. You know what I mean.
Speaker 4: We build up, We build up that value we borrow
Speaker 4: against for something that's important. The value hopefully keeps going up,
Speaker 4: and when we pass on, you know, we do get
Speaker 4: an exemption. And usually for us, for middle class yeah,
Speaker 4: you know, they don't get hammered with the state tax
Speaker 4: in any way. So I don't know what's wrong with
Speaker 4: borrowing against values you've invested in. And I'll tell you
Speaker 4: this too. Most of those investments come I think, because
Speaker 4: you know our tax code. We try to drive investments.
Speaker 4: So you know, when you're in a dollar, there's three
Speaker 4: things you can do with it. You can spend it,
Speaker 4: which a lot of us do. You can save, which
Speaker 4: is economically better, Or you can invest that's risky, no
Speaker 4: guarantee you're getting it, but is the most pro growth
Speaker 4: of everything you do with that dollar. And a lot
Speaker 4: of we're trying and to encourage people of every income
Speaker 4: level to invest more, say more and invest more, because
Speaker 4: usually it's good for them and super for the economy
Speaker 4: and in one of my one of my concerns always
Speaker 4: is when you go after unrealized gains or you know,
Speaker 4: tax hikes on the wealthy, you're actually taking those who
Speaker 4: are the super investors, you know what I mean. And
Speaker 4: our country are willing to risk everything to take us
Speaker 4: to Mars or you know, in some cutting edge technology
Speaker 4: that drives jobs and opportunity in such a big way.
Speaker 4: And so I'm always really cautious about just picking that
Speaker 4: group of villains saying, you know, we need more of
Speaker 4: your affair shares, how much your money you owe me. Yeah,
Speaker 4: I think economically and for the US, it's really the
Speaker 4: innovation and the investment we're We're our tax cod is
Speaker 4: pretty good at this driving that risk.
Speaker 3: So speaking of criticisms, we would be very remiss if
Speaker 3: we didn't ask you about one of the biggest ones,
Speaker 3: which is the impact of the tax cuts on the deficit.
Speaker 3: And I know there are all these different ways to
Speaker 3: measure this, but I think you know one fact that
Speaker 3: probably can't be debated is that under Trump there was
Speaker 3: like eight trillion dollars of debt approved versus under Biden,
Speaker 3: I think there was something like four trillion. And I'm
Speaker 3: curious how you link those two things together. So the
Speaker 3: cuts and the deficit. And I guess Joe don't come
Speaker 3: at me. But are Republicans MMT ers now like do
Speaker 3: deficits matter?
Speaker 4: They definitely do, so sort of reset some things. Look,
Speaker 4: I think Biden's debt was much. It's been averaging two
Speaker 4: trillion a year there, and certainly there was an impact
Speaker 4: from TCJ, but not nearly as much as people think.
Speaker 4: And here's why everyone is shocked when I tell them
Speaker 4: that we paid for most of the tax cuts up front.
Speaker 4: We didn't do a trillion and a half dollars of
Speaker 4: tax cuts. We did five and a half trillion dollars
Speaker 4: because we needed to be that bold to get back
Speaker 4: in the game and drive the drive the economy. We
Speaker 4: raised four trillion dollars through reforms that paid for growth
Speaker 4: and for lower rate and so on the day President
Speaker 4: Trump signed it, seventy two percent of those tax cuts
Speaker 4: were already paid for. On top of that, we've seen
Speaker 4: huge revenue growth. For example, corporations now pay more to
Speaker 4: the government at the lower twenty one percent rate than
Speaker 4: was projected at thirty five. I mean, growth really matters,
Speaker 4: drives a lot of revenues. So I think that one
Speaker 4: and a half a trillion. The Congressional Budget Office quickly
Speaker 4: revised it down to about one point one. We see
Speaker 4: more growth since. And unlike most tax cuts, you know,
Speaker 4: you can safely say for most tax cuts you can
Speaker 4: recover about thirty percent of it. Generally that's the rule
Speaker 4: of THEMB. In this case, we recovered twice that to
Speaker 4: begin with. It's gone much higher. It did create deficits,
Speaker 4: no question about it, but I think much smaller than
Speaker 4: most people ever dreamed we would do. Going forward, though,
Speaker 4: Congress is going to have to raise four trillion dollars
Speaker 4: just to keep the current tax cuts. On the Republican side,
Speaker 4: this is going to be a real issue. Debts and
Speaker 4: deficits matter. It's exploded in a big way, and so
Speaker 4: I think, especially if Republicans run the table, who knows
Speaker 4: how this hat works. In November, I think there's going
Speaker 4: to be, especially in the House, some real serious discussions
Speaker 4: about how much of these of the extensions are paid for.
Speaker 4: You know what, I mean, what do we do, what
Speaker 4: kind of other reforms do we do, either in spending
Speaker 4: or tax cut or the tax code itself to lower
Speaker 4: that that number. So no, I don't see us now
Speaker 4: moving to you know, monitor monetary theory. No matter what said,
Speaker 4: I think it's I think that's the biggest issue to
Speaker 4: worry most Republicans.
Speaker 2: I just have one last question and talked a little
Speaker 2: bit about this where some of the goals you had
Speaker 2: in the beginning with related to international revenues and how
Speaker 2: they were taxed. And there are still some certain sectors
Speaker 2: of the economy highly intellectual property oriented sectors like pharmaceuticals.
Speaker 2: Maybe like something also still you know, iPhones, etc. But pharmaceuticals,
Speaker 2: there's this sense of unfairness that Americans pay some of
Speaker 2: the highest prices in the world for drugs, and at
Speaker 2: the same time, many American drug companies seem to pay
Speaker 2: fairly small amount of taxes with a lot of the
Speaker 2: revenue booked overseas.
Speaker 4: Is there still more work to be done.
Speaker 2: Let's say you had another crack at it and somehow
Speaker 2: the stars aligned, Is there still more work to be
Speaker 2: done in your view on getting that right?
Speaker 4: I think let me just say this tax reform was
Speaker 4: not perfect. Yeah, we went through the political process. On
Speaker 4: the day it was signed, I had a thousand things
Speaker 4: I wanted to do differently, and my advice too that
Speaker 4: to Congress now is don't just extend these them. There's
Speaker 4: always room to do that, I think. You know, we
Speaker 4: went into the international with how do we become super competitive?
Speaker 4: But also how do you prevent companies from exporting their
Speaker 4: income to lower tax countries? How do you prevent them
Speaker 4: from importing their deductions to lower the rates. It's complicated,
Speaker 4: in probably more complicated than needed. We generally achieve that.
Speaker 4: Can you do more in that regard? I think we can.
Speaker 4: But the outcome we noticed was one it was much
Speaker 4: harder for companies to do it. Two multinationals now are
Speaker 4: investing so much more in America than overseas. That's good. Yeah,
Speaker 4: we always got to look at at how we improve
Speaker 4: the international side of this.
Speaker 3: Is there room for more multilateralism when it comes to
Speaker 3: global tax regimes? Could you perhaps coordinate so that it's
Speaker 3: not a race to the bottom.
Speaker 4: You know, I really disagree with that with the philosophy.
Speaker 4: Secretary Llone, who I respected a great deal. I got
Speaker 4: to work with her when I was head of the
Speaker 4: Joining Economic Committee. You know, feel strongly about that approach.
Speaker 4: It seemed to me, you know, the last three years
Speaker 4: America has really been trying to you know, sort of
Speaker 4: course our allies into making sure no one can have
Speaker 4: competitive rates visa vi each other. I think that's a mistake.
Speaker 4: I actually think the race ought to be to more
Speaker 4: grow better paychecks, more competitiveness that way, and so yeah,
Speaker 4: I think these international sort of cabals on tax are
Speaker 4: often mistake. But if you're going to do it, here's
Speaker 4: a lesson from the last couple of years. If you're
Speaker 4: going to do international tax treaties and agreements, you've got
Speaker 4: to take both parties along with you because you want
Speaker 4: the agreement to stick, right, you want to have the
Speaker 4: buy in from both parties. In the past that was
Speaker 4: the case, not so much the last the current administration,
Speaker 4: which is a shame because I think had both and
Speaker 4: even Democrats will say, look, there hasn't been a lot
Speaker 4: of conversation to do international Take the time to keep
Speaker 4: your folks with you. I don't care Republican or a
Speaker 4: Democrat in those conversations, because you're can end up with
Speaker 4: a better product and it'll stick.
Speaker 5: All right.
Speaker 3: This is my last question, But it feels like, no
Speaker 3: matter what happens in November, we are all going to
Speaker 3: have to familiarize ourselves with the reconciliation process. Can you
Speaker 3: tell it? What should we know about that? What's the
Speaker 3: most important thing to remember?
Speaker 4: So Tracy had to go there reconciliation triggering. I yeah,
Speaker 4: let me get this. Let me show you the scars
Speaker 4: on my back. So you know. Reconciliations you use. It's
Speaker 4: a budget process. Both party use them, uses them usually
Speaker 4: for very important things. They're limited basically spending and tax issues,
Speaker 4: tax growth issues, lots of complex rules, but the bottom
Speaker 4: line is reconciliation budget if approved by the House and
Speaker 4: the Senate, it goes to President, allows that bill to
Speaker 4: pass with the simple majority in the Senate, but with
Speaker 4: a lot of rules to go with it. So reconciliation
Speaker 4: happens first. So Congress has to agree on what the
Speaker 4: what the parameters are for tax reform or healthcare in
Speaker 4: the Affordable Care Act or in the in the Build
Speaker 4: Back Better or the Inflation Reduction Act. So that's the
Speaker 4: first step. It's not easy to do it if either
Speaker 4: but but here's the tip tip off. If either party
Speaker 4: runs the table, reconciliation will show us what they're going
Speaker 4: to do in taxes or spending, you know what I mean?
Speaker 4: It will it will show you right up front what
Speaker 4: the guardrails are are around this. If there is divided government,
Speaker 4: which most people think there will be in one way
Speaker 4: or the other, you won't have that, and so you'll
Speaker 4: you'll sort of glean all that at the end of
Speaker 4: the process. So reconciliation is a runway that you land
Speaker 4: these major bills on. The House version will invariably look
Speaker 4: different than the Senate version because of these very difficult
Speaker 4: budget rules. The reason for years Republicans wrote tax reform
Speaker 4: to be revenue neutral was that we could get permanence there,
Speaker 4: which to me, the best tax code is a permanent
Speaker 4: at least as much as you can get with the
Speaker 4: political environment that will change these That's where you get
Speaker 4: the most growth, most certainty, the better outcomes, which is
Speaker 4: why it's been frustrating to in reconciliation. We didn't get
Speaker 4: all of this permanent for the long term. But it
Speaker 4: is what it is, and it's a really an arcane process,
Speaker 4: but a really vital one.
Speaker 2: Kevin Brady, thank you so much for coming on out Laws.
Speaker 2: There was a really fun and very informative.
Speaker 4: Well thanks for having me and thanks for a really
Speaker 4: good questions give complex issue. Tracy thanks, thank you.
Speaker 3: Sorry I stirred up the.
Speaker 5: We didn't start with that, Yeah, Tracy, I found that
Speaker 5: to be very interesting.
Speaker 2: I really liked hearing just like even from a process
Speaker 2: standpoint or a philosophy standpoint of what reform of the
Speaker 2: tax code is, what reform of the tax code is
Speaker 2: within the constraints of the US legislative process. I found
Speaker 2: that to be a very informative episode.
Speaker 3: It was really interesting. One thing I'll say is it
Speaker 3: very much reminded me of a conversation I had in
Speaker 3: a bar once with that's a good sign for any episode,
Speaker 3: well with a policymaker. And I won't say I won't
Speaker 3: say who, but you know, he was talking about how
Speaker 3: there's this tendency to think of there's an idea floating
Speaker 3: around that the US doesn't have a very strong social
Speaker 3: safety net, at least when compared to you know, some
Speaker 3: places in Europe or elsewhere. And he was making the
Speaker 3: point that there is a social safety net, it's just
Speaker 3: so much of it is embedded in the tax system
Speaker 3: rather than direct spending. Yeah, and I don't you know,
Speaker 3: I don't necessarily I'm a journalist, so I don't have opinions.
Speaker 4: And I no, I know.
Speaker 3: No, so I can't agree or disagree with the goals
Speaker 3: behind that, But I do think if you want to
Speaker 3: understand the US economy, it's important to realize like how
Speaker 3: big and complex and important the tax system actually is.
Speaker 2: No, and we could go a lot deeper, Brothers, even
Speaker 2: with like another episode, which is this is such a
Speaker 2: good point, which is how much we rely on the
Speaker 2: tax code, specifically refundable tax credits et cetera, tax credits
Speaker 2: for people who don't pay for tech ownership, like all
Speaker 2: of these things through the tax code where it's like,
Speaker 2: you know, some things like so for example, people talk
Speaker 2: about child tax credits, you could you could just instead
Speaker 2: of talking about child tax credits at all through the
Speaker 2: Social Security Administration, send out people send out checks. Instead,
Speaker 2: you file taxes and you get money. Back to former
Speaker 2: Chairman Brady's point at the end, it does sound like
Speaker 2: if there were ever some if even if we could
Speaker 2: ever agree on one ideal tax system would look like
Speaker 2: it would be a never ending process of sort of
Speaker 2: like asymptotically getting there over time. Probably, thank you, thank you,
Speaker 2: And we're probably theoretically many many more things that could
Speaker 2: be done. Can I say one other thing. You know,
Speaker 2: I sort of I enjoyed hearing this sort of like
Speaker 2: a certain I don't know old fashioned is the word,
Speaker 2: but I would say old fashioned view of like, you
Speaker 2: know what, competitiveness, cutting taxes, this is the path to growth,
Speaker 2: et cetera. It's certain, you know, certain old school vibes
Speaker 2: that I feel against a little bit. Like you don't
Speaker 2: hear as much these days in conversations about growth. You
Speaker 2: hear a lot about industrial policy.
Speaker 3: And I thought it was all about the vibes.
Speaker 2: No, it's just a specific thing of like, you know,
Speaker 2: let's cut the taxes and yeah, like it's nice to
Speaker 2: hear from a believer.
Speaker 3: All right, shall we leave it there.
Speaker 4: Let's leave it there.
Speaker 3: This has been another episode of the Authoughts podcast. I'm
Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our producers Carmen Rodriguez at Carman Erman, Dashel Bennett
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