The 10th Man

Which Trump?

December 1, 2016

As I write, I am silently celebrating the nomination of Steven Mnuchin to be Treasury secretary. A banker (and not a political hack) in that seat is all right by me. Seriously. And Wilbur Ross as commerce secretary? Terrific.

I can’t tell you how happy I am to have private sector guys in these positions of power. I’ll be candid—for eight years, under Obama, business was the enemy. That mindset is completely changing. It seems foreign because it’s been so long.

I was never a Trump supporter. But this is the reality of it: we have just elected a businessman (however flawed) to the highest public office. Trump is motivated by very different things than Obama was.

If you’re wondering about the newfound ebullience in the stock market, this is it. The last eight years saw an unprecedented expansion of the regulatory state. It will be rolled back.

So Which Trump Do We Get?

On the other hand…

The guy we elected to public office likes to tweet in the middle of the night about  throwing people in jail for burning the flag. This can’t continue for four years. I’m surprised it’s continued this long. Donald Trump is the least presidential president we have ever elected—no contest.

It’s also not hard to characterize him as unthinking, anti-intellectual, and maybe even a complete buffoon. Maybe not the best qualities you want in a president. And that’s before we even consider the racial undertones of the campaign.

But a Trump presidency is unquestionably pro-business (if not necessarily free-market), so up, up we go.

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Taxes

The most bullish thing of all about Trump is his tax plan. It establishes three brackets of 12%, 25%, and 33%, and the top rate kicks in at an income of $225,000.

So right off the top, about a 7% reduction in the top marginal rate.

Also: the standard deduction will be $30,000 for married filing jointly, instead of $12,600, which has massive implications. Who pays more than $30,000 of mortgage interest every year? Why itemize deductions? All this running around we do at tax time, collecting receipts and such, could go away for all except the wealthiest.

But here is the biggest proposal of all—make sure you’re sitting down.

Trump wants to lower the corporate tax rate to 15%. A laudable goal: lower the rate, broaden the base, collect more revenue, and maybe repatriate some of that overseas income. But he wants to apply it to not just C corporations but to pass-through entities such as LLCs and S corps and partnerships. I’m sure some people get most or all of their income from pass-through entities. Think about how big this is.

Likelihood of passing? No idea. It’s hard not to imagine distortions arising from a 15% federal LLC tax (everyone opening up LLCs, for example), but even a partial reduction in taxes on small business… yuge, as they say.

Reaganomics

A lot of people are comparing this (favorably) to the early days of the Reagan administration, and the parallels are a bit eerie, actually.

In both cases, you had a Democratic Fed and Fed chairman who was more than willing to rip rates and plunge the economy into recession under a Republican president.1 But go back and look at the charts in 1980, in the days and weeks after Reagan was elected. The Dow looked like a rocketship, and stocks went up with few interruptions for 20 years.

But the big difference between Trump and Reagan (and there are many) are their attitudes toward trade. The modern Republican party has always been in favor of free trade, but not Trump.

Is Trump right? Neither here nor there.

I think the economic impact will be negative, and the question is how negative. Stories are starting to trickle in about how intertwined US-Mexico auto manufacturing is, and that there would be a massive unwind if NAFTA were to be renegotiated.

I blocked a guy on Twitter last week for calling me a filthy globalist or something like that, so take the free-trade views with a grain of salt.

The benefits of free trade are not intuitively easy to understand. I’m surprised it’s lasted as long as it has. I think we have entered a period of de-globalization.

So if you think about who has benefited from globalization over the last 15 years and who has lost—imagine what the world will look like when the roles are reversed. That means bad news for the Chinese underclass and the 1%, and great news for America’s middle class.

Maybe.

Cautiously Optimistic

So I suspect I am like many people, watching the Trump transition with a mixture of optimism and horror. The surprises do not end here. The policy 180 might go down in history as the biggest of all time. And we haven’t even talked about healthcare yet.

I’ve noticed that some journalists are a bit scornful of all these private sector guys in the cabinet. Don’t be. I worked in government once, remember. The main reason I left was because it was laughably inefficient. If the government starts running like a business, it wouldn’t be the worst thing in the world.

You can go back in time and think up presidents who once worked in the private sector (both Bushes, Truman, Carter, others), but not one of them had devoted an entire lifetime to business. Trump thinks more like an investor than a bureaucrat. So there’s a good reason for optimism.

Before I go, I should mention that until December 13, you can now bulk up on investment advice from me and my colleagues here at Mauldin Economics. The VIP service—which only opens once a year—gives you six Mauldin newsletters at one low price. You can literally save thousands of dollars and become a VIP at the same time. How cool is that.
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1This is not a widely held view.

Jared Dillian
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gilmour672@comcast.net

Dec. 4, 2016, 1:47 p.m.

Before you get all excited about Trump’s tax plan, you should look at the detail.  I do tax work for clients all over the ball park when it comes to income.  I looked at four, all in the current 25% tax range. None pays at the 25% nominal tax rate. Their effective tax rates run from 15.52% to 19.59%.  All are MFJ with kids.  You failed to mention that the Trump plan eliminates the personal exemption. With this elimination, one family’s taxable income will increase $20,250, two by $12,150, and the other by $16,200 (using next year’s exemption rate). They already exceed the $30,000 standard deduction, so that does nothing for them.  I wouldn’t jump up and down regarding the 15$ corporate rate.  With the expected elimination of all credits and deductions (except for R&D) many will pay increased taxes.

Larry Towers

Dec. 1, 2016, 3:22 p.m.

When someones’s central premise is wrong the rest of the argument must be thrown out as well.
There was no expansion of the regulatory state. In fact many regulations were to replace or consolidate other regulations. The Absolute number of new regulations was average:
https://regulatorystudies.columbian.gwu.edu/reg-stats
And many of those were consolidations or replacements of existing more cumbersome regulations. Obama established an executive order for new regulations that:

extended compliance dates;
performance standards rather than design standards;
simplification of reporting and compliance requirements (as, for example, through streamlined forms and electronic filing options);
different requirements for large and small firms; and
partial or total exemptions.
Cite one regulation that was more onerous for most than the one it replaced.


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