Jason Hartman introduces The Trump Tax Plan. Laurence Kotlikoff, William Fairfield Warren Professor at Boston University and President of Economic Security Planning, Inc, joins Jason to discuss the impact the plan would have on the economy. They look at what the new tax plan would mean to real estate investors. The conversation ends with whether or not lower personal income taxes increase consumption and stimulate the economy.

Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.

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Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:04
Welcome to the creating wealth show. This is your host Jason Hartman with episode number 960 906. Thank you for joining me today as i talk to you from sunny, beautiful fall weather in Las Vegas, Nevada. I tell you, both Scottsdale which Scottsdale Arizona was my favorite place to live so far. In Las Vegas, they have pretty similar weather. And, you know, other than about four months of the year in each of those places, the weather is just, it’s just beautiful. It’s really, really nice. I came up with something many, many years ago probably 20 years ago that I call you ready for this? The Myth of coastal properties the myth of coastal properties, as I owned a real estate company in Irvine, California, which had offices also satellite offices in Newport Beach, and Santa Ana, California as well. You know, we sold a lot of high end upscale properties, places like Newport coast, Crystal Cove, all around Newport Beach and high end areas of Irvine and so forth. And one of the things I came to realize is that this coastal property stuff, it’s kind of a myth. And here’s what I mean by that when it comes to weather. You know, some of these areas at the coast, these beautiful, very, very expensive real estate areas, they’re socked in by the marine layer, many, many, many months of the year. The weather is just gray and gloomy and, you know, kind of awful. I mean, look, I like gray day once in a while. I think it’s kind of nice. When I lived in Scottsdale, it was just so beautiful every day when you had these like three gray, overcast days per year, it was a nice change. I don’t dislike gray with you know, the gray sky. It’s kind of neat, you know, but I’m to have it every day. When you pay $8 million for your house is kind of

Jason Hartman 3:04
ridiculous. I call that the myth of coastal property. So a little real estate and weather thing they’re combined for you. So today our guest will be Laurence Kotlikoff. He’s back on the show, some of you love his ideas and his theories about the economy. Some of you think he’s kind of out there and you know, just not really on it. So, you know, let me let me know what you think I always appreciate your feedback. And, you know, everybody says that about every economist because economy, well, what does Harry dent always say, which I don’t know, Harry dent? This may be a good a good thing because Larry, lately Harry dent has been a little off. Right. But I don’t know, maybe not, you know, some of his stuff is pretty darn accurate. You know, in the business of predictions, that’s a tough business. Let me tell you, you go out on a limb and you take a lot of risk when you make those predictions. But what does Harry dent say? He has a great saying about economist. He says the study is of economics was created to make astrology look credible. The study of economics was created to make astrology look credible. I don’t know, you know, maybe that’s not such a slam against astrology. Some of that is kind of eerily accurate. I’d say, I’m a Libra, by the way. So take it from there, but whatever. Anyway, before we get to Laurence Kotlikoff, I want to share with you, the prizes, the big cool prizes for our five year plan contest. Yes. Last week, I mentioned that we are having a contest for whoever can come up with the best five year plan for their real estate portfolio, their life in general, what they want income property to do for them, and what they’re willing to sacrifice to make their income. property investments work because nothing comes without sacrifice. To believe that it does is speculative. It is gambling it is in mature. There are a lot of people in life and we know them all. And I’m sure we’ve all done this at times ourselves. I know I have, I’ll be the first to admit that are waiting for their ship to come in. But they’re not willing to swim out to their ship, right? And we all know as we grow up and we become adults, you know that instant gratification is a myth, whether it be health and fitness or investing or career advancement or relationships or anything, you know, you got to make sacrifices, you got to make compromises. You got to give something up in order to gain something. The world operates largely on a quid pro quo basis. quid pro quo. If you Know what that means. That’s Latin it means value for value, the value for value exchange. So to build a great real estate portfolio, to build your own income property Empire, you’ve got to make some sacrifices, right? We all know this. You know, intuitively, I remember Earl Nightingale many years ago, teaching me at age 17 years old boy, I’m so glad I discovered these great mentors so early in my life that just changed my life. I mean, you know, and I’ll just give you a little example, one of our clients, Messiah who has been on the show before, he’s going through some struggles with his portfolio right now had some challenges, you know, but he’s the kind of guy that will get through it. He sees the light at the end of the tunnel, he sees the big picture. And he wants to interview me on the show about my life a little bit. And you know, we’ll get around to doing this interview, I’m sure in the near future. But one of the things I will tell you about my life just right now for a moment is It is amazing to me how the right mindset will just change one’s life. And, you know, like most people, I grew up without much in the way of material abundance. It was pretty scarce in my life when I was a kid did not have much money at all. And I went to several integrated schools of junior high in high schools, public schools, crappy public schools, terrible Los Angeles public schools, by the way, that pretty much haven’t changed. I visited them recently and they’re falling apart. It is disgusting. I mean, these schools are so broke because they’ve been so mismanaged. They’re so top heavy with administrators and lacking teaching staff and lacking well, paint. I mean, these buildings are just pathetic. In Los Angeles. I mean, it’s just good. It’s unbelievable. It really is. And the public school system is so mismanaged, they just want more Money just throw money at them. Haven’t we thrown enough money at these people? They’re just bureaucratic administrators with the NEA the national extortion Association. That’s what Steve Forbes called them. And I think he’s pretty accurate, otherwise known as the National Education Association, but yeah, it’s a total mess, right? Anyway, enough of that enough of my rant. What was I even talking about? Oh, yes. Growing up in scarcity, growing up with a lot of bad influences in my life, but getting my mind set straight at age 17 by Denis waitley, Zig Ziglar Earl Nightingale and Jim Rohn, my four big great mentors that absolutely changed the course of my life. And I got into real estate in my first year of college. I started with century 21 in Anaheim. I was 19 years old. I was part time I was going to Long Beach City College. You know, it was amazing. To me how fast my career took off. By the time I was 24 years old, I remember that year, I believe my gross income on my tax return, said $324,000. And I had actually deferred some income waiting for some closings. So my real income was about $390,000, at age 2424 years old. And I tell you, what would all of you do hearing that? Well, here’s what you would do. You would say, Jason, I gotta run to the internet, or just go on my own calculator. Maybe I have an app for that on my phone. And I’ve got to adjust that for inflation. Well, let me save you the trouble, because now I did adjust it a few years ago. So you’d have to adjust it again for inflation. But that $324,000 is over $700,000 today in today’s dollars, by the official stats, which we know underestimate inflation Of course. Because it’s a big scam, but hey, we’ve talked about that on prior episodes. You don’t need to hear another rant on that. Because, you know, I like to get off on tangents about this stuff, don’t I? Well, anyway, can you imagine just by meeting those four great mentors not meeting them in person at that point, but listening to their cassette tapes over and over again, reprogramming my mind by the age of 24. Just a few years later, they had changed my life to an extent where I was making in today’s dollars as a kid without a college degree. By the way, I didn’t finish college because, heck, I was making so much money. Why would I finish college right? Back then it felt really lame to not finish college. I mean, for many years, I really felt like a loser. Even though I was doing great. earning a lot of money. Very, very successful. My pretty much my entire real estate career was marked by rather extreme success. And my investment, my investing career also was very successful. So, you know, as I was being a real estate agent and brokering properties for clients, and then I bought my own company and when I sold that company in 2005, to the Coldwell Banker group, I had 65 agents, I think at the time, and, you know, got a big check for the sale, but definitely had some struggles, you know, on and off throughout the years. But Heck, you know, the mindset is what made it possible, my willingness to go through the hard times to be incredibly persistent. You know, you may not notice this on the surface, but I am an incredibly tenacious, persistent person. And I learned a lot of that from my mother who grow up in even more, you know, scarce circumstances than I you know, in a farm in upstate New York being the middle of five children. She was totally poor. Growing up. I was not Quite that poor I was at least in a more urban environment, although my environment you walk out of my house and Mar Vista, California and run the risk of getting killed or mugged. Well, heck, I got mugged all the time. Actually, it happened to me a lot. That’s what made me so tough. You know, I was used to getting mugged at school, you know, all around my neighborhood and so forth. But nowadays, marvista is actually kind of gentrified. It’s a much nicer area than it was back when I lived there on Caswell Avenue. Okay, so there you go. A little bit, but But yeah, you know, Earl Nightingale told me to ask, what is the importance of attitude in a person success is like asking what is the role of h2o, water, of course, in the Pacific Ocean, right? It’s everything. I mean, it’s not everything, but it’s almost everything. Look, there’s a little bit of luck, I admit, I think luck. I believe in luck. There’s some luck, but largely, we make our own luck in life, right? So, heck, this ought to be a 10th show, right? But let’s back to your five year plan, folks, you gotta get your plan in writing, or on video. That’s what we’re asking you to do for this contest. We’re doing the five year plan contest. So you got some big prizes. Again, like I said last week, make a video, a short video, you know, 234 or five minutes maybe talk to us about your where you are now. And where you plan to be in five years. What’s your five year plan? How will income property investing and income property be a part of that plan? Hopefully, it’s a big part of it, because hey, it’s the most historically proven investment class in the entire world. And here are the prizes first prize. Well, let’s go from the bottom like David Letterman would do in his top 10 list. Okay, the third prize is the new brand new, second generation Amazon Echo and that is the third price. The second prize is a lot bigger than the third prize. See, this is the way it works in life. You know, there’s a huge difference between first, second and third, right? But hey, look, don’t do this for the prizes. Do it for yourself. Do it for your future. Do it for your family’s future. Okay? Don’t do it for the prizes, but the prizes are pretty darn cool. Okay, check this out second prize, a venture Alliance weekend for one person. That’s a $2,000 value and an Amazon Echo second generation. So that’s a 20 $100 value for the second prize. But first prize, well, this is good. This is a 40 $297 value. 4300 bucks, basically, right? Okay. So you get a $500 travel allowance to meet the masters. So you probably cover here, airfare most here. Hotel you can cover your entire hotel with that. But hey, you got a $500 travel allowance for meet the masters. And you’ve got a venture Alliance weekend for two people. For two people. Bring your significant other, bring your friend, bring your business partner, bring a colleague at work, whatever you want. Bring your mom, your dad, your uncle, your cousin, your friend, whatever. That’s a $3,000 value for adventure lines weekend for two people and general admission ticket to meet the masters. Why do I say general admission? Well, because we’re going to be offering as we announced some big name speakers here very shortly. We’re going to be offering a VIP ticket upgrade. So right now, tickets for meet the masters are $797. This of course is our annual event. This is our 20th anniversary of that event, by the way, in La Jolla, California in January start off the year right. So this is a 42 Hundred and $97 value 4297 is our first prize for the five year plan contest. But again, don’t do it for the prizes. Do it for yourself. Do it for your future. Okay, make a little video. Again, gritty, unprofessional doesn’t matter. Hey, if you know how to do videos, you can make it real slick and swanky and professional. Okay? Do whatever you like. Okay, but get your five year plan on video, get it on record, and we might share these on the podcast, we might show them it meet the masters who knows. You know, we did this several years ago for free tickets to meet the Masters many years ago. And some of the videos that people came up with were phenomenal. They were phenomenal. I mean, look, you can do this easily just whip out your phone, write down a couple bullet points without your phone and talk about it. It’s super simple. So five year plan contests first, second, third prizes first prize 40 $300 value, second prize 20 $100 value third prize, hundred dollar value. We look forward to hearing your plans. But again, don’t do it for the prizes, do it for yourself. Okay, get your tickets for meet the masters. If you already bought a ticket By the way, the ticket price will be refunded if you are the first prize winner, or you can give that ticket away to somebody else. Also, if you are a venture Alliance member, you are certainly eligible for this. So you pay an annual membership fee. And we will just extend your membership by one weekend if you win any of these prizes, so we’d love to of course have our elite members of the venture Alliance enter the contest as well. You are certainly included in this venture Alliance. Without further ado, let’s get to Laurence Kotlikoff. But remember, tickets for meet the Masters early bird pricing Get it? Well, you can. Jason Hartman, calm slash masters Jason hartman.com slash masters. And here is Laurence Kotlikoff It’s my pleasure to welcome back a returning guests. That’s Dr. Laurence Kotlikoff. He is William Fairfield Warren distinguished professor of economics at Boston University. He’s president of economic security planning, and has done extensive studies on the unfunded mandates or unfunded entitlements, and generational accounting as it applies to the country and the overall economy. Lawrence Welcome back. How are you? Great. Nice to be back with you, Jason. Good, good. So you’ve got I believe, an op ed in the Wall Street Journal just today about the Trump tax plan. Tell us more.

Laurence Kotlikoff 18:39
Gotten a lot of bad press. I think undeservedly so not that I’m a supporter of Trump or supporter of Clinton’s I’m a political but tax policy needs to be apolitical. It’s we’ve got a crappy tax system. We’re not getting enough revenue. The economy is stagnating, we need to fix the tax system. So Economists just have to say what any particular plan whether it’s good or bad or, you know, whether it will help. And the precedent Scott and or the reaction to Scotland has been really wild. Former treasury secretary Lawrence Summers, who was the chief economist for President Obama, for the first term, described it as an atrocity. Paul Krugman described as 10 lies. Katherine Ram Ram pal, who’s a columnist for The Washington Post described it as ridiculous. Now, they’re basing this analysis or these comments on a study done by the Tax Policy Center, which is a consortium of the Brookings Institution in Washington, a think tank and another Think Tank called the Urban Institute. And the Tax Policy Center has some excellent tax economists and professionals, a lot of people who used to work in the Treasury for both administrations, but they have pretty outdated models. They don’t have the right model to study this particular tax reform that the republicans have come up with. And this tax reform has changes on both the personal side, but very important changes on the business side, where the going to lower the marginal effective tax on investing in the US the incentive to invest on in the US will be much better under this reform. So the big question is how much investment will come into the US, we can think of that as more equipment and factories and more real residential real estate businesses. So it’s capital, different types, investment inventories land that’s improved, this is what I mean by capital. So more capital makes workers more productive, and then that means that they will get paid more in the marketplace. So in order to study the reaction to this tax reform, you need to have a model that incorporates the global capital market, because that’s where the capital is coming from. It’s coming from abroad, if it’s going to come from anywhere because Americans are not saving enough, and that’s the hope of this particular reform. So the Tax Policy Center did a preliminary analysis and we say assume that there was basically no capital inflows from abroad whatsoever, there was no growth effects. They use what I call closed economy models to study this issue, where they assume that the US was like, by itself without there being the rest of the world. And that’s really quite ridiculous. And then nobody looks at the details of what they did. They just look at the bottom line. And the bottom line statement of the Tax Policy Center was that the tax reform is going to produce a $2.4 trillion deficit over the next 10 years and that three point something trillion dollar deficit in the following 10 years. So that all sounds very scary. And and they also said that top 1% we’re going to get all the benefits of this reform. So I’ve been building over the last three years. A very large jail simulation model called the Global guide, our model, which is called that because it’s was funded in part by the Gaidar Institute, which is in Moscow, believe it or not. And I’ve been working with a team of Russian economists and us economists for about the last three years to put this model together. And it’s kind of the together with another economist named Alan, our back in the 19, late 1970s, we developed the first large scale simulation model realistic simulation model, the US economy, and then through time we’ve been that model is being used all over the world, it’s being used by the CBO, the Joint Committee on Taxation, it’s a well known model, the standard model doesn’t make any crazy supply side assumptions. And I just took this model and said, Well, we need to make a global version of it. And we have one and so I used it to run the republican tax plan through it. And lo and behold, it looks pretty good. It doesn’t change things from you know, it’s not like enormously good impacts and it’s not as good as the first plan the republicans came up with which has been beaten back by predictor interest groups, unfortunately, but this plan will raise output by three to 5%, and wages by about 5% or so. And on average through time, and the capital stock from about 15%. So, if you go to the Wall Street Journal today, you’ll see an op ed that I wrote about the tax reform. There’s a link to it at my website, Kotlikoff dotnet. And also the original article that I wrote with my co authors that forms the basis for the op ed. So you can see all the results of what would happen if we implemented this reform, at least according to this model. Now, no model is perfect. But this model at least allows for the thing to happen that everybody’s hoping will happen, which is that capital will come in from abroad, and that will get growth it doesn’t assume that there won’t be any economic response. of the economy to what is a very major reform of the corporate tax system. So anyway, I think that, in this case, economic news about the tax reform has basically been fake news. It’s been a distortion of what economists can really say and should be saying about this plan. It’s and also on the, in terms of the fairness, the plan, as simulated is going to be raising workers wages by about 5%, say, five, five and a half percent. Now the rich, the super rich and more wealth and wages, right. So this is an improvement in the well being of people that aren’t super wealthy, it has to be set against the fact that we would have under the plan, top bracket of 35% rather than 39%, although the plan does permit or qualify for the possibility of bracket for very high income people. So I’m currently using a different Programs study the fairness of the plan and what kind of a fourth bracket we would need to maintain Frances and But to be clear, the reform in its current state without without the fourth bracket is not that much different with respect to progressivity as the current system from it’s not very different from the current system in terms of fairness. So, this proposal has been tarred and feathered, but people need to understand that the original plan which has been modified, was actually half of the plan was proposed was based on the business part of the reform was based on a reform proposal that was developed by a quarter mile an hour back, he and I developed this simulation model initially back in the late 70s. And Alan’s a professor at Berkeley and he certainly not a Republican. So the original republican tax plan was kind of developed by somebody who was a Democrat. The most important part of it was a democratic plant feel like a guy who’s probably never voted Republican in his life. I don’t know for sure what his Everything about Allen’s politics but I don’t think he’s ever voted for Republican. So we just had a good tax plan called the better way plan. And then it got all kinds of distorted press, mostly from the left of center press. Not that I’m left of center right of center. I’m not personally right wing left wing. I just saw the articles that were written repeatedly in the Washington Post New York Times about that reform, and they could not be further from the truth because the reporters just did not know enough economics, enough public finance to get anything right. They were getting it all wrong. And the the people the Tax Policy Center were weren’t helping sort this out, because they have the wrong tools. They’ve got tools that are inappropriate, so that now we have a second rate tax reform plan, but it’s still much better than than the current system. And that’s something that you know, I said in today’s Wall Street Journal, and in the paper, that’s that Kotlikoff dotnet

Jason Hartman 26:51
Okay, so you were a fan of the plan, then would that be fair to say just to sum it up,

Laurence Kotlikoff 26:56
I wouldn’t say you know, I we could do much better than that. Plan.

Jason Hartman 27:00
Okay, but it’s better than what we have now.

Laurence Kotlikoff 27:03
Got. Yeah. super big fan of the plan. I just but it’s certainly a positive of what we I would much prefer to have it inactive than not.

Jason Hartman 27:10
Right. Okay, so let’s drill down a little bit and dissect, you know, some kind of key points, if you will. We’ve got a lot of listeners who are really interested in real estate investing. And Trump, I like to say, you know, Trump is our first real estate president, but I don’t know that his plan has necessarily been that favorable. Or maybe it has, I’d like to get your thoughts on it. People constantly accuse Trump of sort of feathering his own nest, if you will. But I don’t know, you know, what does this mean to real estate investors.

Laurence Kotlikoff 27:41
The original plan allowed you to write off any real estate investment. It’s called 100%. expensing. So you could write off if you bought a new apartment building, you could write it off immediately. The new version doesn’t allow that. You just have to depreciate it just as you do under the current law. On the other hand, the original plan didn’t let you if you borrowed money to buy that building, the original plan would not let you deduct the interest payments that you had to make from your taxable tax base from what had to be, you know, taxable corporate profits. Whereas under the new plan, you are allowed to deduct interest. So, I would say that, on balance, the move to the new plan has been worse for people in real estate, because what we call marginal effective tax rate for investing in real estate is not changing, it’s not going down. So there’s not really a bigger incentive to invest in real estate under this new plan. There was a bigger incentive under the old plan, but you do get to write all six equipment under the new plan. So let’s take a simple example. So for someone

Jason Hartman 28:46
who just wants to buy a single family home as a rental, under current law, they can depreciate that over 27 and a half years. They can write off expenses against the income right, what changes here

Laurence Kotlikoff 28:59
if the plan But nothing, basically nothing changes. Okay. But plan is beneficial to real estate investors because it will lower the tax rate at which they have to pay taxes to the extent that their businesses are organized as corporations as Schedule C corporations as standard corporations, so very few

Jason Hartman 29:22
people, small investors, they’re not using they’re not using Oh, sorry. Well, they’re usually using LLC is treated as s corpse. Okay, with an S election. That’s the typical,

Laurence Kotlikoff 29:33
yeah, there’s also a reduction in something called attacks on pass through entities. So if you’re a S corp, or a proprietorship, and you own real estate, or just a household that has on the side is has bought a rental property. I believe that that would be viewed as proprietorship income, and that would be taxed at a maximum rate of 25% as opposed to 39%, which is the current law.

Jason Hartman 29:57
That’s a big deal. That’s really good. Yeah, right. That’s huge. That’s huge. I mean, I mean, think of the difference in that that’s about a third less. That’s huge. I mean, hugely significant. See, I think the thing is, you know, number one, people always have to realize, and I’d love to hear your thoughts on this, that there’s always an equalizing factor for everything. Say, for example, the plan wasn’t good for real estate investors. Well, what that does is it shrinks the supply of rentals, and ultimately makes the rents go, it puts upward pressure on the rental prices, right? So the income increases. The thing that kills people, though, is it that adjustment period usually takes a couple of years when things are adjusting, right. And so, you know, everything sort of always seems to even out at some point, because there’s always an equalizing counter factor, but, you know, there’s an adjustment period to that thoughts on that.

Laurence Kotlikoff 30:51
You’re raising the question of who actually bears the benefit of certain kinds of tax changes. So, you know, for example, we could provide us subsidy to teachers. And if there was just a very elastic supply of teachers, so that are lots of people were going to teaching at the current wage. Now what happens is that what school systems have to pay teachers goes down, because the teachers are going to get the subsidy from the government. So the teachers compensation doesn’t change at all. It just consists of less paid by the school system and more pay by the government and the subsidy and the local property owners who have to pay property taxes to pay for the teachers. They get the benefit. So it sounds like it’s helping teachers but it’s actually helping property owners in a local town. That’s an example of it passes through what you’re talking about. It passes. Yes. So one has to be careful understand all these feedback loops to see who the ultimate beneficiaries are. We call this tax incidence in public finance and economics. So it’s a huge field and he Dominic’s important field, because generally who the government thinks are helping is not who they’re helping and who they think they’re hurting is not who they’re hurting

Jason Hartman 32:09
on the law of unintended consequences, and that’s why I just favor smaller government because there’s always this feedback loop, like you say, and, you know, raise the minimum wage, raise unemployment, you know, it’s like it’s just a feedback loop or or raise the prices to consumers of those companies products, you know, the executives are never willing to take a pay cut, you know, it’s not like they’re going to bear the burden. They’re just going to pass it through somehow, you said that you thought the tax plan would increase foreign direct investment. Now, you know, there’s been a lot of talk Lawrence about all this money offshore that these large corporations keep offshore because it would cost them a fortune in tax liability to bring it back. And there’s like this documentary that’s really quite interesting. This is above my paygrade. But, you know, like the double Irish tax scheme, and you know, apparently Apple does this, Google does this. Is that what you’re talking about here in Florida. investment or just general foreign investment

Laurence Kotlikoff 33:01
just Well, it doesn’t have to be US companies who have profits abroad and aren’t repatriating them because they’ll be subject to taxation if they do. I mean, that problem is there and would be alleviated by this tax bill. But we’re just talking about, let’s say, a typical French household and wants to try to invest in US stocks versus French stocks, invest in the US company, that company doesn’t have to pay as much taxes so can pay a higher return to that Frenchman, then without the new tax law, right. So it doesn’t have to be US companies that are investing back in the US, but it can be anybody foreign companies, foreign households, foreign governments. And so we’re predicting a very big increase in investment and,

Jason Hartman 33:46
and that’s gonna be good for America. That’s gonna be a big time. Yeah,

Laurence Kotlikoff 33:49
that’s right, right. There’s not too many places where you can kind of lower the tax rate and actually hope to get more revenue out of the system. And that’s what our simulation show that this is one of the few cases where our model would actually produce what’s called a Laffer curve.

Jason Hartman 34:07
Yeah. Arthur Laffer.

Laurence Kotlikoff 34:08
Yeah, because the tax on investing in the US can include the state, local disincentives to invest, as well as the federal disincentive is quite high. It’s about 34.6%. Right now, the average tax rate is around 14%. So we have a lot of loopholes. So kind of take that to the extreme. Suppose you had a marginal tax of for investing in the US 100%. So anybody who invests lose basically everything they make to the government? Well, in that case, nobody wouldn’t invest in the US, and the revenues on the corporate tax would be zero. So that’s a case where the marginal tax rate would be very high, and the average tax rate is zero. be obvious to anybody, including Larry Summers, that lowering the tax rate from 100% to something lower would produce some revenue and the win win because you’re aren’t collecting any revenue. So when you see a march Tax really high and average tax quite low. It’s not 100% versus zero, but it’s 34% versus around 14. And that’s a sign of pretty significant inefficiency. So that’s a red flag to public finance, economists might like myself that you can actually take advantage of that cut the rate and get rid of the loopholes at the same time, and actually end up with more capital flowing in and higher wages and more output, you have higher wages, then you’re gonna have higher personal taxes at the individual level. So all the tax policy centers analysis, if we go back to that point, since they don’t, don’t incorporate any of these feedback effects, they miss all the extra revenue that will be generated because of the growth and consequently, they’re predicting enormous deficits. When our model says they want to rise that it’s basically a revenue neutral policy. So I think there’s, you know, very good people there, but they’re stuck with crappy models. For this particular issue, the models are fine for some other issues, but not for this one.

Jason Hartman 36:05
Yeah. So the point being and you know, call it whatever you want supply side economics trickle down, whatever. But the point being that if the tax rate is lower, and it incentivizes growth oriented behavior, ultimately, the economy wins, right?

Laurence Kotlikoff 36:21
Well, it’s not true for every tax cut. I mean, if you just cut personal taxes in the same very same model, you’ll get deficits and less capital capital will be crowded out because people savings will be going into government bonds, not into stocks, and other investments, real investments, and there’ll be less capital and lower wages in the future. And there’s no Laffer Curve possible there. Explain that if you would do the crowding out. So if you just straight cut personal taxes, that’s not going to have a positive benefit deficits will increase because the government will have less money coming in and the economy won’t be stimulated by the fact that people have more money in their hands with which to do whatever they do. Now, they’re going to consume more, they’re going to work less, because they do have an incentive to work more, but they also have more income in their pocket and on balance, they’ll work less, and they’ll consume more. And if we can consume more and with less output, we’re going to have less investment and saving. And we’re going to have a smaller economy in the future. So absolutely not. If you run that kind of model and our model in the same model that shows this tax reform actually grows the economy, that kind of a policy will will hurt the economy. I don’t mean to belabor this point. But wouldn’t that increase consumption stimulate the economy overall, or no, no, because, you know, when this economy grew, suppose we consumed every single thing we earned, we saved nothing. And we’d have no money to invest, right? Suppose everybody around the world did that, you know, look around you. There’d be no buildings. No, you gotta have capital formation. You have to have capital, the idea that we need to spend our way into prosperity. Well, that’s kind of a notion that Keynes produced back in the 30s. And I think he was trying to coordinate people into space. Bending, getting everybody on the same page that there will be a lot of spending. And therefore, the businesses who are so depressed and so concerned about hiring anybody not being able to sell what they make, would then in a coordinated way higher, and you’re gonna have this self fulfilling prophecy. So I think this notion of during recessions during bad times of trying to get everybody together to spend more is really about trying to encourage coordinated action by entrepreneurs, by businesses to hire, because the first thing that happened in the great recession in 2008, after Lehman Brothers went down is that employers started firing employees that had no problems with their banks, their banks weren’t in trouble. You know, think about it. We had not a single bank, except Lehman actually went bankrupt. The building didn’t explode. None of the people died who worked for Lehman. They all had new jobs pretty soon after that. Nothing physical happened, but over the next 19 months, we had eight and a half million people unemployed, that was a coordination failure. So consuming more in recessions or getting people to consume more is a way to try and coordinate behavior. You could have done in other ways without actually spending that kind of money. You could have said the President could have had a meeting of all the top executives instead of the top 1000 companies and said, I want you to rehire everybody. You just fired and hire on top of that, another 20%. And let’s get this economy going. If you all do it, you’re going to have more customers. And that could have turned things around just there. But the basic story when the economy’s not in recession, is that it for to grow, it has to save and invest. And if you look at the 50s in our country, that’s when we saved the most and we grew the most. If you look at Japan in the 70s and 80s and 60s, that’s when they saved and grew them the most. Look at China and there was perfectly high savings rate for the last 2030 years. growing like crazy. Yeah, so no country that has grown And dramatically has done by spending.

Jason Hartman 40:02
Alright, fair enough. Gotta have capital formation. Okay, wrap it up for us. I know we got to go and give out your website if you would as well. I know you gave that up before but just a reminder.

Laurence Kotlikoff 40:11
Well, I’ve got a couple websites for people one is Kotlikoff dotnet is my academic website. So it’s just my last name co t Li k o FF dotnet. And then I have this you know, you and I’ve talked about personal financial planning software, and I have a company on the side I wanted to mention great.

Jason Hartman 40:29
please mention it because I think this is a great thing. It’s turbo. I’m calling it TurboTax for divorce settlements, but you call it what you like.

Laurence Kotlikoff 40:38
It’s great. Well, we do have a great divorce program and a great script program and a great lifetime financial planning program that will kind of Robo optimize your living standard raise it and they’re all at economic security planning calm. So if people can remember economic security planning comm they can get to that site or they can just go to Kotlikoff dotnet because My company’s websites are listed right on the front page of Kotlikoff dotnet.

Jason Hartman 41:04
Good stuff good stuff. Laurence Kotlikoff, thank you for joining us again. My pleasure.

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