tv Council of Economic Advisers Chair Kevin Hassett on Tax Reform CSPAN February 6, 2018 4:07pm-4:49pm EST
market volatility. i think the market is quite strong. i have checked in with mark the participants this morning before i came to make sure there was orderly market activity clearance functioning, no systemic issues and i'm happy to report that i got the green lights. >> do you believe, does this have financial stability implications? >> no. i don't think these types of moves given how much the market rallied do have financial stability concerns. >> well, the administration claims credit for the markets going up. are they going to claim credit for the markets going down? >> i think we will claim credit for the fact is still up over 30% since the election. >> we will have that tonight at 8:00 on our companion network, c-span 2. up next, is kevin hassett. he spoke at georgetown's law
center for economic law. >> it is my pleasure to introduce our lunch speaker, kevin hassett. many of you may know kevin. he is currently chairman of the council of economic advisers and before that, was a senior ekeehn mist. held the james q. wilson chair m american culture and politics at the american enterprise institute. aei, where he was one of the leading thinkers there. and before joining aei, kevin was senior economist at federal reserve board. now any of you who know kevin or have seen him speak know he is a clear thinker, a straight talker, and says what he thinks. and he is, i think, serving the
administration, the country extraordinarily well. the format we're going to used to is question and answer. i will lead off with a question or two for kevin. and he has been kind enough to be willing to accept questions from the audience. he has hard stop at 1:30. let's keep that in mind. let's have a round of place for our panelists this morning, first. [ applause ] >> thank you. >> i'm going to sit in this chair. i feel like, i don't know whether it is charlie rose or david ruben stein. >> don't want it tato talk abou that. >> exactly. let me start, kevin, with a very broad question.
on the recent tax reform bill. what, in your view, are the three most important changes that that bill accomplished? >> yeah. thanks so much. let me begin by thanking john for his leadership for all these years. i think he wrote a meeting. but if it wasn't the first, it was the second. is it the first? >> we take credit for your career. >> yeah. >> or could be the other way around. >> yeah. >> you have such a distinguished group here because of that. >> right. >> but anyway, i think it has become a highlight of the washington leader every year at the event because you bring in, you know, even people from oxford and i think we think about average take rates and the like. we have learned so much. and i know that there are probably diverse opinions about
the nuances of the international tax rules and tax bill in this room. but i think that there are a heck of a lot of good things in the tax bill that owe themselves to research that itf has had over years, nonpartisan academic, and tax economists in the world and here they are. so it is really an honor to be here. a lot of my old friends since i've been here eating lunch ask me what it is like to be in the white house. i have one sentence, i never knew what it was like to live dog years, but i'm doing that now. it is an honor to have the clans to serve this country. three things i think are most important, i guess people could pick and choose, but i think it wouldn't surprise anyone to say that i think that the tax rate getting to 21% is something that really mike devereaux's work here in the front convinced me
that that's probably the thing i would call number one. the reason i would say that's number one instead of the expensing is when i was in grad school and alan and i started writing papers on the capitol that i was convinced that expensing was the most important thing. now as i watch the tax code evolve over time and watch literature move along with it, i have been convinced that things like plant has more than just marginal tax rates and getting the tax rate in the u.s. down to 21% should, we thought that should cause a lot of firms to want to relocate their activity here in the u.s. and i think anecdotely that is already beginning to happen. one thing of the ca staff is we help fact check stuff that comes through the white house. and one of the things, and of course, being nerds, we are
pretty aggressive about it. and one of the things i thought is that there was daily number in the president's speech but the person who put it in the speech neglected that last year we had data was leap year. so you had to divide by 366. another one was that it turns out that if we were to ask people in the room how many firms are there in the will shire 5,000, it sounds like one of those jokes, right? but it turns out there aren't 5,000. it is 3,900 and something. so it is factually incorrect. the reason i mention that is that the fact that there is well more than p 00 fir3p 00 firm 00 what they are doing.
and what it will do in today's job support where january wages spiked to a level that was the highest. a so forget about, that monthly changes are volatile, right? but the 12-month change smoothes through a little bit is the highest it's been since 2009. and i think we talk a lot about that. >> i know, there is political debate and how much distribution there should be. and alan and i had disagreements about how he did inequality work but one thing we tended to all agree about is that we should have a society that equalizes opportunity. and i would think that big expansion of the child credit, which went bigger than the president initially hoped, is the kind of thing that everybody who understands that equalizing opportunities is a good idea should support and i think that that's very important part of
the tax bill. because it is getting money to people who really need it. the third thing, i go to something that seems minor, and i think i said in the new york times a few days ago, that if we look back it might be the biggest part of the tax bill and we should talk about it a lot more, is creation of opportunity zones. which is something that jared bernstein did and sort of advocating academics ever since. i think opportunity zones increase the chance there is a race to zis stressed communities in america and that i think is an important component of this tax bill because as we go out and say it encourages capital formation and wage growth then the natural question somebody would have, is how do we know that won't happen in san francisco or some other place that's booming.
den j denver is a booming labor market. how do we know you will help the distressed communities that everybody cares the most about that needs the turn around around right now and it i think it will create a positive equilibrium that everybody is creating because of the stress capital. >> very interesting. i will ask one more question then i will turn it to questions from the audience. and that's the impact on this bill of the deficit. round numbers joint committee staff scored this on a static basis is losing over ten years a trillion five, i think, then the dynamic score was took it to about a trillion. if you add interest on the additional debt. you're around a trillion three over the budget window. should we be concerned about that? >> you know, round numbers, i
think, of course you should always be concerned about the deficit. and present value is the fiscal situation doesn't look so good, of course. but i think that if we look at tax bill in isolation and think about the deficit impact that it has, i think there's been a lot of confusion about it and i wouldn't mind straightening out. first on the corporate side, as you know, the corporate side almost statically scored is neutral, a few hundred million over ten years which is relative to the size of gdp is rounding here. so corporate side almost revenue neutral. because of the beat and things you talk about earlier today, there are things that gather revenue, offset the revenue that was a lowering rate. so even if you think about the tax model that i disagree with, it is too cautious of outgrowth,
getting down to a trillion dollar static score, dynamic score for a bill that gets the rate to 21% is pretty impressive given that most of the growth effects come from the torp rate si corporate side. the child refund credit, which i think as one of the three most important parts of the bill is about $700 million. there are other parts, you could pick an choose. but with the child tax credit, you could have something as an 86 style act. i know we are all concerned about the deficit and we understand we have a long running balances that have to be fixed, but when you think about the tax bill, that i would say if you remove the child credit, it is similar to an 86 act. so you have to ask yourself, if you think it is the margin worth the deficit increase that i gave
you and i think most people would think it was. so what do we do in the long run and that is certainly something that gets a lot of attention from everybody in town and the white house. in the short run we have this raging problem with the least competitive tax code in the development world and the the least tax credit in the development world got way too much attention this year. if you look at the last decade, then profit growth is about 10% a year for profit firms and wage growth over the last decade is minus .4% over three years. and we did some structural break analysis and there is never a time in u.s. history where the two headed in directions so opposite. there is a complete disconnect in how well firms are doing and workers are doing. i believe because these profits
were booked in ireland to get the lower rate and so on. but not just by belief that one of the things that career staff does, they give you these awesome charts and one of the things they do is look at productivity growth and where it comes from. one of the charts they've been maki making forever, i know for 20 years, is the contribution to the growth from capital deepening. and the contribution from capital deepening went negative for the first time in u.s. history in the second half of the obama administration. imagine the economy growing and activity growth is negative and depreciation is overwhelming and you ask why did wages grow minus 4% a year? well because we had capital deepening going negative for the first time in history. why? because profits in operations were over there.
because we had this tax code that said don't locate it in the u.s. locate it over there. and by will give you a big tax break. i know there are a lot of tax expert that understand this. but an example that i like to use, let's speez thuppose that samuelson and hassett is making shampoo. we have been for a while. it's very profitable. then john, because he is such a clever international tax guy says, hey, you know, why don't we make the samuels and hassett shampoo in ireland. so firms say, yeah, let's close down our plant in u.s., put the plant in ireland, and have headquarters in the u.s. so john and i don't have to sell our houses. say the shampoo we sell for $10 a bottle in the u.s. we make it in ireland. then the u.s. parent buys the
shampoo from our own sub ssidia in ireland for $15 a bottle. sell it for $10 in the u.s. we lost 5 bucks. we post a $5 loss for the parent. and post healthy profit in ireland because they sell it for $15 instead of $10. then the parent has a loss. what does the parent do? the parent carries it back. so we have this system where the u.s. tax code is subsidizing the location of the plant in another country. and when you have sort of caught this feature, unless you're in the ex termination business, which is bad, and the future here is fixed by the code. and i think we are already seeing in movements and wages
that, last thought, people say oh, well, there's been, you know, i think our current count is more than 3 million workers affected by announced wage increases of more than $1,000. why is it happening already if there is capital deepening? milton freidman would say that should happen right away. but again, contracts that slow it down and i think that the bonuses would be explained by optimism that u.s. firms have that this activity that used to be there is coming back. and fear that the competition will steal the workers. for retention they get ahead of the wage increases that they expect people will be offered. it is really early if tn the ga and we want to see at least another many months of the data that we just saw today. but again, at a manual rate of wa wage increase that couple out s
came out is 50%.ame out is 50%. >> that's good news. >> yes, well it could be a blip. we are smoothing through the ups and downs. and it is the fastest interest. >> maybe identify yourself. >> a lot of things expire after 2025. at the end of 2025. how should we think about the administration's position and you know, what is supposed to happen after that? are they going to -- is the idea they will be extended then how do you make up for the tax revenue you lose from that. if the idea is they are not supposed to be extended, then why did we have them in the
first place? >> right. there are a lot of expiring provisions. and this goes back to the very first tax paper that i wrote, that i coauthored with a guy at the table over there. and we wondered about how firms should think about future tax policy. because it is expected future tax policy that matters. and expected future tax policy of course isn't observable. and our identification idea back in the day is still brag on what i thought was a clever idea. that after the '86 act they phase in changes. so we thought it was reasonable to say the tax policies was the phased this thing because people would surely expect there wasn't be a reversal of the '86 act within the next three or four years. and someone over there concurs.
so i think, let's just be economists for a minute, as we model capital spending right now in can tis pags of the future tax policy, then there is stuff like the expensing that expires. and for those of you keeping score at home, that expiration shows up in the delta gamma term in the use of cost which means it is like having an investment tax credit and how it should accelerate right away. i see four people in the audience shaking. oh, yeah. so in sm things accelerate activity now because you want to get stuff in before it expires. activity now because you want to get stuff in before it expires. activity now because you want to get stuff in before it expires. activity now because you want to get stuff in before it expires. activity now because you want to get stuff in before it expires. activity now because you want to get stuff in before it expires. but some things go the other way, if the rate went back to 35 and expensing disappeared, then the long run capital start would be uneffected and so therefore, how much do you want to change capital today given in the end
your target is where you started with. so my view is that as an economic modeler than when it is important to do is wrap my brain around what firms are doing what they expect. i will do that before i talk about what government should do. i that i one thing that is clear from work i've done, is that there is a big impact of elections on tax policy uncertainty. i was asked in an interview just yesterday when i look ahead to things i'm worried about for the outlook then what am i worried about? one thing i'm worried about is that there will be an election where people are elected who want to eliminate all of these things. if you look at history of presidential politics, then usually as you go into the fall it is 50/50ish, right? so what that means is that right
now if you are thinking about what the odds that corporate tax stuff for decision-makers is all there five years from now then you know, i could take a poll. if we had clickers, maybe we would get something like not a hundred percent, right? and so i think that this idea that if i say that i've got permanent tax for ten years that that somehow is really important to the modeling. i think there is a little bit to it. if you have a permanent thing then it is harder to reverse and so on. in terms of economic effect, the expirations i think are not at the margins super effecting things. because of the uncertainty that is there. i i think the white house position, i said i would get back to that, is all day long they want stuff to be permanent and that we understand tb the
burg rule and we understand this there is expiration of things. g rule and we understand this there is expiration of things.t rule and we understand this there is expiration of things. a lot of it happened when obama came in. he extended a lot of the bush tax rate. if it works the way we think will be extended on bipartisan basis. i can say with expensing in particular, one reason why expensing costs a lot at the end of the budget window is you take depreciation from outside the budget window and move it inside the budget window. so there is a huge cost at end of a ten-year period even though it is basically moving the same amount of money from over five years into one year. that doesn't matter in the first year but it matters a lot in the ninth year. so my view is that if you go to five years from now, then the ten-year cost of adding a year to expensing is zero. and so are they going to do
that? well i would question if we remodel it as firms we expect it to be permanent but by induction. right? so it is better if it is permanent by law. but permanent by induction is bet are than where we were a couple of months ago. >> absolutely. yes? >>. [ inaudible ] >> hey, ralph, wait for the mic, too, please. yeah. >>. >> you can state your question and i'll repeat it. so the question was, how
important is the repeal of the death tax in the calculus. it wasn't one of the three things i listed. so i think that in our economic models of taxation, and the death tax is a tax capital so we tend to want to do away with it. it is something that mike has written a lot about it and he remarked on how in polls it is almost impossible to construct a poll where you can find someone that would pay the death tax and yet it tends to be one of the least popular taxes, which is interesting. so i think the death tax on the other hand, you know, really does fall very much on very high income people. so they think it is relatively distributed in a manner they
like. so to say the death tax is on the agenda after every election, people to repeal it, and those who took a tax class. then folks on the left who are worried, as thomas was, about acquiring more and more society and wanting to undo that with the death tax. the death tax on the table is the easiest thing to forecast. i would guess if it were going to be fully eliminated, they would have done it in this field. i guess a lot of political change might make it so that would happen. but i think there was a compromise that you saw that probably reflects the political reality that there is a lot of differing opinion on that topic. my hope is, again, going back to jim hines's question, is that the good news for the people in this room is we just gave you a lot of variation to study.
a lot of papers can be written. the hope is that over time, i know that the idea that the link between corporate taxes and wages was significant was controversial during the debate. i believe strongly in the literature we excited and what the president announced in the state of the union, and my hope is that as academic literature evolves, there is a lot that helps the bipartisan consensus make a whole bunch of this bill permanent. my guess is that there is not enough academic work that i can envision that would make that a political reality on the death tax. >> thank you. >> there is a fellow over here. >> oh, didn't see you. >> hi, good afternoon. thank you for joining us. >> the mics don't seem to be working. >> i'll repeat the question. >> thank you for joining us. my question is about i guess
paying for the tax plan. [ inaudible ] there is some theory that -- [ inaudible ] when the economy tanks or whatever, you can pull back and be less fiscally tight. my question is, other questions with competitive corporate tax rate have pretty high individual income tax rates. [ inaudible ] so my question then is how are we going to offset our lowered corporate tax rate in the same way those countries do. and if there is another downturn or bubble, are we going to be in a position where we can do something about it given that now when the economy is improving our debt is still growing? >> yeah, thanks for the question. i think that again, that the
first step in that president pri prior advertised this, is to make that competitive again so plant would locate here.a adver make that competitive again so plant would locate here.t adver make that competitive again so plant would locate here.i adver make that competitive again so plant would locate here.s advero make that competitive again so plant would locate here.e adver to make that competitive again so plant would locate here.adveo make that competitive again so plant would locate here.dvertis make that competitive again so plant would locate here.ertised make that competitive again so plant would locate here.sed thi that competitive again so plant would locate here.ed this, is t that competitive again so plant would locate here.d this, is to that competitive again so plant would locate here.ed this, is tt competitive again so plant would locate here.zed this, is to mak that competitive again so plant would locate here.tized this, it competitive again so plant would locate here.itized this, is to that competitive again so plant would locate here. so if the self-inflicted wound is so high and the cost was so much bigger than the tax on the corporate side, it is the individual side stuff that cost a lot. that potentially if the growth especially getting into the deficit. in europe what happen had over time, and here is where i respectfully disagree, is that
they increasingly relied on valued taxes to replace inkucom tax. so individual taxes are below ours. so i would think that one tax scholar wouldn't prezidict the same strategy. so what would you do if you decided to fix the long run balance? my guess is that in the end, and this is not an administration position, this is just kevin the economist talking, in the end what will happen is that people look at the entitlement programs and progressively adjust them and make policy changes that restore them to balance in ways that require bipartisan consensus. last time that happens is the greenspan commission a long time ago and that if growth disappoints, and the deficit disappoints, then i would expect that a commission like that would be called to start to envision changes like that, that
would fix the long run deficit. but there's not an inkuks tax thing that you can do to fix imbalances that alan and bill gail talk about.fkuks tax thing that you can do to fix imbalances that alan and bill gail talk about.lkuks tax thing that you can do to fix imbalances that alan and bill gail talk about.ukuks tax thing that you can do to fix imbalances that alan and bill gail talk about.xkuks tax thing that you can do to fix imbalances that alan and bill gail talk about. tax thing that you can do to fix imbalances that alan and bill gail talk about. much more fundamental taxes would be required to suggest the long run. >> someone had an interesting long mic that seems somehow effective. >> i wanted to follow up on your example of -- can you hear me? >> yes. >> we need a boom mic. >> sorry. so your example of ireland and the u.s. being more competitive in manufacturing because of the
lowering of the difference between the corporate rate in the u.s. and ireland, and while i agree over all, very good thing to minimize that difference, the reality is that most manufacturing doesn't take place in ireland. it takes place in other much lower-wage countries. so the difference there between labor cost between lower skilled countries and lower skills available is much greater than the difference than in changing the corporate tax rate. so i don't understand how your example on ireland fits into that overall global market. >> sure. that's a great question. people might locate a plant in some other country for lots of reasons. there's an aluminum smelting
boom going on right now in iceland. because they found out that geo thermal allows them to make cheap aluminum. so there are lots of reasons to determine why stuff is located in this stuff or that. and the difference between the average u.s. wage and wage between the foreign worker has been an important contributor as well over time. though a diminishing one. as they ramp up and get their per capita closer to the pus p when you talk about what is the impact after change like this, the location decision, then you have to think about well the tax rate is important but we have to control other factors too. if you look at the work of mike devereaux in the room, that's what they do p you say at the margin, what's the tax effects p pr.
jim hines has a paper showing that the tax is pretty high and others criticize a t and say it is lower. but hines's work is generally reliable. but they are adjusting for things at the margin. the irish wage has grown a lot that they have received a lot of positive wage demand from location decisions there. john, do you want to add something? >> yeah. i was going to help you out on this a little bit, using our shampoo business. it isn't either or. it doesn't have to be, it can be low-cost labor or low taxes and they can compliment each other. in our sham bpoo business we ha
the patent around the shampoo. maybe manufacture it it in taiwan with a contract between it and ireland and ship it to the united states. but the profits would all be in ireland because that is where we would attribute the value to our great shampoo to that. that's where the rate comes in. the question is, if the patents are in ireland, i can manufacture anywhere in the world except in the united states. i can't manufacture in the united states the way our tax laws work. >> under the old law. >> under the old law. there is less reason now for me to manufacture in ireland than there was before. there still may be a reason. we may be half way to shore. but we have moved in the right direction, i think. >> so at the embassy of ireland, we bet before. >> yes. and we have discussed this at
length. we are quite positive this bill is positive for ireland. no one should short ireland because of it. >> i called your office to get the photograph of you standing in front of the statue. we're the youngest population in the eu per highest educational attainment rates in the oecd. >> i could finish this sentence and only english-speaking country in the eu. i've heard this before. >> the essential thing is we don't dispute the fact clearly there is some tax advantage in locating and investing for u.s. companies in ireland. if they are going to look to access the eu single market and but i think it is a little disingenuous to characterize investments based solely or
principally on -- >> so it was, is it just taxes that bring people to ireland. and there is also an educated work force and so on. there was a study a while guy i would be happy to point someone to, but first i have to refined the reference, that looked at -- and i'm not saying we want to call ireland the tax haven. but looked what happens to the economic growth and tax haven over the intermediate growth. and it is a low property in a low tax environment but in order to do that you have to locate the experts. people who develop the software and so on. and so the world bank report shows activity increase in started out as attractive tax locales.
because of those people go to ireland for apple and dwogoogle. and they have a lot of smart people there. but they are sent there. and they have high growth rates. as a final thought i'm serious if you run through the technical its of the international tax rules then it seems like this is going to be a net positive for countries like ireland still but there is more activity moved from other eu countries. maybe john could walk you through that in the afternoon session. >> yes. >>. [ inaudible ] so the differentiation between headline and effective rate is extremely small in ireland because we apply the rate so broadly. >> pat september 6.5%?
>> 6.25%%. >> 6 of.25%.e september 6.5%? >> 6.25%%. >> 6 of.25%.n september 6.5%? >> 6.25%%. >> 6 of.25%.t september 6.5%? >> 6.25%%. >> 6 of.25%.i september 6.5%? >> 6.25%%. >> 6 of.25%.s september 6.5%? >> 6.25%%. >> 6 of.25%.september 6.5%? >> 6.25%%. >> 6 of.25%.eptember 6.5%? >> 6.25%%. >> 6 of.25%.mber 6.5%? >> 6.25%%. >> 6 of.25%. 6.5%? >> 6.25%%. >> 6 of.25of.25%.of.25%f.25%.22. i wouldn't want to overstate it. >> what would be on your list of things to address next? >> i think that the president has a very ambitious year ahead for us. and since i started in the white house last summer, i have been involved in principal meetings on a million things. and i think that you know, he is about to make a big announcement that will have a lot of big ideas about the infrastructure. i know your question is what is next for taxes. honestly, like after this tax bill passed, i moved on to infrastructure and welfare reform.
so i have to get a creative writing prize to come up with how to change the tax code. there are things in the final tax bill that weren't the things that we thought we weanted at te beginning. but i thought the president showed intuitive strong leadership when he said here are nonnegotiables. we did go from 20 to 21%. that was relatively small. so i think that the tax bill is a huge legislative success that i don't think that i anticipate tax legislation this year. given how ambitious that is this year. especially on infrastructure. >> please join me in thanking kevin. i forget that itpf did super charge his career ear ly on. but seriously, we are all lucky to have someone with kevin's
grit, intelligence and fresh perspective serving the country. >> thank you, sir. >> and anything we can do to help you and help us, we are happy to do. please join me in thanking kevin for taking time-out of his schedule.out of his schedule. out of his schedule. >> in the u.s. house today members have been working on a continuing resolution to fund the federal government past this thursday's deadline. according to cq roll call the stop gap would expire on march 23 and include provisions quote heavy on defense and health care designed to bring strong support from both parties. we will have full coverage on the c-span networks over the next two days. tonight on c-span, james mattis and air force general selba testify on the defense strategy and 20128 posture review. we will have that for you in its
entire entirety tonight beginning at 9:00 eastern. we will have steve mnuchin's testimony before the house committee. he commented on yesterday's stock market drop in an exchange with carolyn maloney. watch that tonight starting at 8:00 eastern on c-span 2. wednesday morning, we're live in jackson, mississippi for the next stop on the c-span bus 50 capitals tour. mississippi attorney general jim hood will be our guest on the bus starting at 9:30 a.m. eastern. now representatives from facebook, youtube and twitter brief members of the senate commerce science and transportation committee on the efforts to address removing nefarious users and accounts.