There are political discussions to be had about the GOP tax bill, which you'll have heard and read of elsewhere. There are economic discussions to be had on the bill as well. And sometimes, to be honest, there are slightly weedy economic discussions to be had, which is where Kevin Hassett comes in.
He's the chairman of the White House Council of Economic Advisers, and Marketplace host Kai Ryssdal spoke with him Friday morning. Find a full transcript of the conversation below.
Kai Ryssdal: How you're feeling on day two of this thing, now that some of the knives are out from some of the groups who aren't wild about it?
Kevin Hassett: Yeah, I guess that one of the things about the swamp is that when you walk in there then all of a sudden the swamp creatures start coming out. In tax reform what happens is that there are all these deductions and special interests giveaways that have been built into the code over time, and if you eliminate them in order to have a broader base so that you can lower rates, then all of the swamp creatures have this picture in their mind that, 'Well actually this bill is pretty good but it even be better if my narrow thing could stay in it.' And then they start fighting for that. And I think we're starting to see that kind of thing happen.
Ryssdal: Yeah but hang on, because we're talking about the National Association of Home Builders. We're talking about the National Federation of Independent Businesses. I mean, call them what you will but they're not swamp creatures right? They're legitimate interest groups.
Hassett: (Laughs) They're legitimate interest groups, but I think that their analysis is just incorrect. The fact is that if we make our country an attractive place for businesses, then that's going to drive income growth and wage growth and that will increase demand for housing and so on. And so if you look at the very narrow provisions that they're worried about, and if you look in isolation and maybe they have a point. But if you take the plan as a whole then they certainly don't.
Ryssdal: All right, let me ask you the big picture question before we get to the corporate stuff, which is, I know, of maximum importance to the GOP on the Hill and also to the president. Here we sit, as you know, with an economy very near full employment. It is growing, things are generally on the upswing. Why do we need a tax cut right now?
Hassett: Well the fact is that profit growth has been fantastic over the last eight years, it's been about 11 percent per year, but wage growth has been virtually nonexistent. In fact, even in the employment report that we got today the wage growth was very disappointing. And the reason is, that normally businesses in the past when they started to do well, then they would reward their workers. But now there's a disconnect because the profits are offshore. And so what we need is a big corporate tax change that both tightens up the rules so that we become territorial and we're keeping an eye on global income, and also has a low enough rate that we become an attractive location for capital. Once we do that then factories will start locating here. That'll increase the demand for workers and get wages reconnected to profits.
Ryssdal: Isn't another way that workers could be paid more just to have companies pay workers more?
Hassett: It's the same thing that I just said. So right now companies are moving, at a really high rate of velocity, they're moving their activities offshore to tax havens. About 11 percent of the workers in Ireland are employed by U.S. multinationals who are moving all the profits there and increasing the demand for labor there but not here. And so if they locate the plants here, then that will increase the demand for workers and that will increase their wages. That's how it happens it's a demand and supply thing.
Ryssdal: The last time though that we gave special conditions for companies to bring back profits overseas, they didn't actually spend that much on workers and all of that, right? I mean you know, they bought back their own shares, they paid dividends, right? I mean...
Hassett: No, no, but you're mixing apples and oranges now. Because what happened the last time is that they had a repatriation holiday, which if you go back and look was something that I didn't speak favorably of time. Because it didn't address the fundamental problem that we have the highest corporate tax on earth, and people don't want to locate activity here. And so they had a holiday, but people didn't move a whole bunch of stuff back here because we were still a 35-percent-rate country. So now in this bill we become an attractive place, and so with the one time repatriation fee, that's going to free up a lot of money to come back and build factories here and so on. But the people should rationally want to build the factories here because now we have a 20 percent rate. With the previous bill it was, I think, far-fetched to think that there was going to be a big change in activity, because we didn't change the fundamental calculus of being in a competitive country.
Ryssdal: But I guess what I'm saying is, you're counting on the largess of companies to come back here and do the right thing for workers, right?
Hassett: No that's not— it's not largess to optimize your plant location based on the characteristics of the countries that you analyze. So U.S. multinationals right now are looking at a 12.5 percent tax rate in Ireland and the fact that U.S. tax law lets them move their income willy-nilly there. And in the new bill, then we're going to be a 20 percent rate and it's going to be hard to move income around and so they're going to choose to locate here. And that's not just theory, it's something that we've seen over and over. So you have to think about it: If you go back to '94, when the U.S. increased its corporate rate from 34 to 35 percent, the average in the developed world was about 40 percent. Now the average is about 24 percent, and that includes lots of countries that have governments that are far to the left of even left-wing Democrats. And so the reason why corporate rates were reduced all around the world is people kept reducing the rates and seeing that "Oh that attracts business, that's good for our workers," and then they would do it again. A typical country cut the rate two or three times since we increased ours.
Ryssdal: What happens if this package doesn't get passed?
Hassett: You know, I think that all the signs are that this package has an enormous amount of momentum. There's broad support in the Senate and in the House, and I think that's why business capital spending has been trending up, because firms are starting to be optimistic about what their tax rates going to be next year. And it's why equity markets have been celebrating. I think that if the bill were to fail, it would be really bad news for both of those.
Ryssdal: Your your colleague Secretary Mnuchin said essentially the same thing a number of weeks ago, and I don't want to put words in your mouth but it kind of came off as a threat, right? Either pass this in the stock markets or the stock market's going to crash.
Hassett: It's not a threat, in the sense that I have no power over markets. You know, I don't think (laughs) — Secretary Mnuchin, he's a much smarter guy than me, but I think he also has no power over markets. It's just factual analysis that when people are thinking about what a company is worth then what they'll do is they'll discount all the future cash flows after tax, and if we expect that there's going to be a tax rate reduction next year, then the value of that after-tax and value goes up a lot. And so the market right now has factored in some probability that the tax bill will pass. It's kind of hard to say exactly what that probability is, but let's say it's 50/50. So that means that there's a 50 percent chance of a big increase in the after-tax value of firms, and that's why the market's been heading up. If the chance goes down to zero then they would go back down. And that's just simple analysis, it's not a threat.
Ryssdal: Can you help folks understand how a corporate tax cut is going to get higher wages for American workers? I mean, you came out a number of weeks ago with that report from the CEA saying it's going to be $4,000. Help me understand how that's going to happen.
Hassett: Sure, yeah. And so what happens is that right now, if I am a U.S. multinational and I locate income in the U.S., then the combined tax rate counting state and local is about 40 percent. If I locate my income in Ireland then it's about 12 and a half percent. So 12 percent is a much lower tax than 40 percent, and so naturally then the multinationals going to want to locate the money in Ireland. But as a practical matter, the way it does that is that it sets up a factory in Ireland and the thing that it used to make here to sell here it makes in Ireland to sell here. And it buys a lot — the U.S. firm, before it sells it to you — buys a lot of the stuff at a very inflated price. So the subsidiary in Ireland gets a lot of profit, and the company here doesn't post any profit and that high price shows up, by the way, as a big increase in imports. There's a recent study that suggests that more than half the trade deficit is attributable to this transfer pricing trick that we just talked about. But again, how does it transfer to wages? Let's go back to the beginning: The way the process starts is the company locates a factory over there instead of here. So that increases the demand for workers over there, reduces the demand for workers over here. That increases the wages over there, and doesn't have the increased effect, or the positive effect, on wages here because the demand isn't going up here.
Ryssdal: Is what you're saying, that workers bear a disproportionate share of corporate taxes in this country?
Hassett: Yeah that's exactly right. And again, this is not just theory or anything. In the report we released last Friday, we listed you know a whole number of studies. One that's just about to be coming out in "The American Economic Review," which is like "The New England Journal of Medicine" of economics, that shows that workers wages respond enormously to corporate taxes. But this is not— So there is some fancy econometrics that shows that, but this is not a new idea. If you go back to David Ricardo way back in the day, hundreds of years ago, he said that, well, if you have a tax on a mobile factor, like capital, then the mobile factor will move. It's kind of tautological. And the immobile factors will end up bearing the tax, and so in our world today, capital is very, very mobile, but workers are not, and so when you try to tax capital it moves away, and the workers end up holding the bag.
Ryssdal: Without getting into a "he said, he said" argument over the economics of this, because you would win, there are studies that show the opposite of what you say. And let me just give you the anecdotal question here: I've talked to some CEOs in the last 10 days and they say 'Yeah no, I mean, we're not going to give people a $4,000 raise, what is that?"
Hassett: First, I disagree that there are people that show the opposite of what I say, in the sense that that — you know, as a practical matter that means that you would take my answer and multiply it by negative one, right?
Hassett: What's really happening is that there's a continuum of results between "workers bear none of the corporate tax" to workers bear, actually there's some papers that say more than 100 percent.
Ryssdal: Right. Right. But let's—
Hassett: I'm kind of in the middle there, but there are some people that are below me.
Ryssdal: Let's take the question in the spirit with which it's intended, right? I mean there are people who disagree with you, but anecdotally I'm telling you...
Hassett: No, but I'm just characterizing — Can I respond please?
Ryssdal: Of course.
Hassett: I'm characterizing the disagreement, though, as being different from the opposite of what I say. So the people who believe the low end of the literature say that folks will get about $1,000, a $900 pay hike because of this bill. I think that a conservative estimate is $4,000. There are other papers of literature that say it's a lot more than that. But the range is all positive, and $1,000 is a heck of a lot of money to ordinary people. So even if you take the low end, then I think that you should vote for this bill.
Ryssdal: Even though there are corporate CEOs out there who are telling me "Yeah, no, we're gonna — we have other things we need to do with that money."
Hassett: Well, what's going to happen to the CEO who thinks that nothing is going to happen is that a plant is going to locate here that was about to locate in Ireland, and that competitor is going to try to hire a bunch of workers, and then the employer that's not doing anything is going to have to pay his workers more or lose them to the competition. You know the best way to get a pay raise is to get an outside offer, and this tax policy will give us a whole bunch of new outside offers. That's where the wage effect's coming from.
Ryssdal: Let me turn to another thing on this bill. It is, as you know, about a $1.5 trillion worth of deficit finance tax cuts. Why is that OK for a Republican Party that's been so strictly anti-deficit and anti-debt for so long?
Hassett: Well it's a trillion and a half cost on a static basis. It sounds like a huge amount of money, but if you divide that by ten and consider that at the end of the 10-year period that GDP is about $20 trillion, then the deficit reduction is very small on a static basis, and it doesn't take much growth at all to close the gap on that.
Ryssdal: Yeah, but you're banking on a whole lot of economic growth, which this economy has a really hard time doing in the last 10 years.
Hassett: Right. You're exactly right, 100 percent, that the economy has not done a good job of growing over the last 10 years. And so even if you look at the long history of financial crises, something that Reinhart-Rogoff wrote a famous book about, then we've underperformed even amongst the set of countries that had a financial crisis. I think it's the view of the Trump Administration that one of the reasons we underperformed is that we have the highest corporate tax on earth, and we had a huge increase in regulation, big increases in marginal tax rates — all things that in every economic model I've ever seen, slow growth. And so we can disagree about how much growth you get if you reverse those big negatives, but it's certainly going to move in a positive direction.
Ryssdal: Am I also right though that you're banking on growth to help you finance these tax cuts?
Hassett: Oh, it's absolutely true that the $1.5 trillion 10-year score is a kind of worst case scenario, that if you get no growth out of this then you're going to see a big increase in the deficit. But I think that the academic literature suggests that we should be highly confident that we get could get a good growth dividend out of this proposal.
Ryssdal: Last question sir and then I'll let you go. I want to turn to the Federal Reserve sir, very quickly, on the theory that you were in the room for at least some of these discussions. Jay Powell, nominated yesterday by the president, as you know, to replace Chair (Janet) Yellen. The president said very nice things about Chair Yellen yesterday, and I do wonder, as do a lot of people, if the economy is so good and if he says such nice things about Chair Yellen, why is he letting her go?
Hassett: You know, I think that at the CEA, I have an enormous amount of respect for Chairman Yellen and for the independence of the Federal Reserve. I think that Jay Powell is just a fantastic candidate. He's got ample experience, he's been at the Fed for a number of years, he served previously at the Treasury Department and has a lot of real-world experience. He's just a first-rate candidate and I support the president's decision to nominate him. I just hope right now that he gets confirmed quickly, so that we don't have the uncertainty over the Fed Chair hanging over markets for the next few months.