Hi. We're here with Carl Tannenbaum, Chief Economist of Northern Trust. Carl, great to see you.
Good to be with you.
So early in the summer the prospects for tax reform looked slim. What's changed?
We wrote in the summer that tax reform was unlikely because the political and financial calculus argued against it. The political calculus was complicated by the fact that they were a community of Republicans that didn't want to add a nickel to our debt or deficit. And the financial calculus was such that it seemed impossible to offer big tax cuts while keeping the budget in balance. Well what changed primarily was that both the Senate and the House offered themselves about a trillion and a half extra dollars to borrow money to make room for the tax cuts. And as a result the negotiations found themselves on a much faster track.
From an economic standpoint, what are the potential benefits?
There are some good things in the reform proposals. One of the main ones we've written about as well, which is that the American system of corporate taxation actually puts American companies at a disadvantage to their foreign counterparts. Our tax rate is that much higher that companies are moving their headquarters, their staff, and a lot of their investments to overseas countries. And one would expect now under the new proposal, if it's approved, that some of that would move back in this direction. The proposal also narrows the difference between large and small companies which is very beneficial. And of course the lowering of tax rates themselves will likely add a little bit to people's pocketbooks and hopefully economic activity.
What's the potential impact on the federal budget?
Well now that's a number crunching exercise that's of an order of magnitude that is beyond my meager capabilities. They're going to have to calculate not just what the initial cost is, but then how the economy will react. And one of the things that we're finding is that if the economy, which right now is running at full capacity, is pushed even further we could see more inflation. And if there is more inflation then the bond market might react by raising interest rates and so might the Federal Reserve. If rates get higher that's bad for economic activity and that might offset the benefit of what happens with tax reform. So the net is very difficult to determine, and of course different people will have very different opinions on that front.
So what is your bottom line in terms of an assessment?
I'd have to tell you that, again while there are good elements to it, the timing may not be right. We're 8 and 1/2 years into an economic expansion. We've just had two consecutive quarters of very strong growth. Unemployment is much lower than when we've done tax reform before, and so the risks of overheating the economy with this measure are high. And I worry a little bit about how much we're adding to the debt, not just in the 10 year window, but beyond. Debt that our children are going to have to repay
Carl, thank you for your perspective.
It's my pleasure.