Tax Reform THE SUPPLY SIDE ARGUMENT September 27, 2017 I don’t do Twitter … there’s a lot of reasons, mostly having to do with securities industry regulations, but probably just as importantly, anyone who knows me knows I can’t order a cup of coffee in 140 characters or less. But if I did “tweet”, I would have a lot to say about tax reform. I have written a couple of newsletters on taxes, and also mentioned the subject in my quarterly performance reports. As the subject begins to gain a little traction with congress, I may be speaking out (“tweeting”?) on the subject from time to time. “Not Interested”? Well you need to be because if the final bill looks anything like the current proposals being bandied about by the administration and the congressional leadership, you, my beloved clients, are probably going to be the losers in the final analysis. The highest earners are going to be the winners at the top end, and more people will come off of the tax rolls at the bottom end. Those in the middle – you and I – are going to pay the bill. This particular dynamic is not the subject today, but I’ll elaborate to the extent of your interest if you don’t believe me; just give me a call. Today’s subject is “Supply Side Economics” (the Twitter version). We’re talking about the ability to reduce taxes, not where the savings should go. We’re not talking about whether you should be able to deduct your NJ property taxes or your charitable deductions. (If the bill comes out as currently proposed, both of those deductions could go away.) The issue for now is simply the concepts of “deficit neutrality” and “dynamic scoring”, both terms of art related to supply side tax theory. For the uninformed, in twitter format, supply side theory as it applies to tax reform is simply the proposition that if you reduce taxes you will increase revenues. “How/why” you ask? Because reduced taxes will increase activity on the “supply side” – business and personal spending – resulting in more consumer demand, more jobs, higher wages, and ultimately more taxes paid at a lower rate. Heard about the “multiplier effect”? It’s really no more difficult than that. To the uninformed/uninitiated or the committed liberal, this concept goes sufficiently against the grain such that it is a hard concept to grasp or to concede. Unfortunately there are deficit hawks on the conservative side of the argument as well – the Tea Party - who’s primary requirement of any tax program is that it must be “deficit neutral”, i.e., every dollar of tax reduction must be paid for with a dollar of tax increase. There appears to be a substantial portion of the Republican party who understand and support the supply side argument, but they are a few votes short of a sufficient majority to pass such a bill in the Senate (kind of like the health care vote). And they aren’t likely to get a single Democratic vote in support. (I can hear President Obama chortling; “Payback’s a bitch, ain’t it?”) There was a debate this morning by two reporters on CNBC, one in favor of the supply side argument and one against it. (side comment – I’m dying to write an article about “why do we care about the opinions of reporters?” Their job is to report the news, perhaps to give circumstantial or situational context, but not to color or pontificate on it in any way. But that’s for another day. Anyway back to the debate.) The proponent gave a pretty good argument in favor of it, and said we need to give it a try. The nay-sayer, saying “nay” as nay-sayers are known to say, offered the counter argument, “it’s been tried, it never works”. Well let’s take that statement to the garbage dump where it belongs. I mentioned in an article shortly after the election one serious problem we have in this country is our short-sighted expectation of results. We do not recognize that there is never gain without pain. We change political parties – and policy and practice along with them – every 4 to 12 years. We rarely get more than 8, and very rarely more than 12 years of consistency in policy in this country, and the reason is because we get impatient with the pain that change requires, such that we are unwilling to wait for the gain. Result – we always quit in impatience before a given policy achieves the desired results. But we do have a historical analog and I can sum it up pretty succinctly. William Jefferson Clinton took office as President in January 1993. The following eight years were the greatest eight years of economic expansion if not in the history of the world, certainly in most of our experience. Clinton likes to take, and is freely given tremendous credit for these boom years, and indeed he should be. Now Clinton is not known as a supply-side economic theorist so how does his track record fit in my treatise? Because the credit I am willing to give Bill Clinton is that he was dealt a good hand and he played it very well. But who dealt that hand? Ronald Wilson Reagan took office as President in January 1981. Unlike Clinton, Reagan’s term started out in a deep recession. But when he ran for reelection four years later he ran on a platform of “It’s morning in America”. Things had taken a significant turn for the better. One of the signature achievements of Reagan’s presidency was tax reform – greatly reducing tax rates and simplifying the tax code. I would suggest, without much fear of contradiction on anything other than ideological grounds (the nay-sayers again), that Reagan’s tax reform initiative was the dealing of the hand that Clinton played so well. So for anyone who suggests that the supply side argument is without supporting historical precedence or evidence of success, I would simply point to the Reagan – Bush I (Republican) years, followed by the Clinton (Democrat) years as a good example of what has happened and perhaps can happen again. The nay-sayer will call this revisionist history, unwilling to give Reagan the credit I believe he is due. But as Ronald Reagan himself liked to say, “It’s amazing what you can get done when you don’t care who gets the credit”. Congratulations, Bill Clinton. Good job. Jim Denton The observations and opinions expressed in this commentary are those of the author and do not necessarily reflect the views of LPL Financial. This commentary is for general information only and is not intended to provide specific advice or recommendations for any individual. Income Tax services provided by DFS Advisors, LLC are conducted as an outside business activity separate and distinct from our relationship with LPL. LPL Financial does not provide tax advice or services.