For Election 2020, The Trump Team Floats A Keynesian Tax Cut

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Posted: Nov 14, 2019 11:34 AM
For Election 2020, The Trump Team Floats A Keynesian Tax Cut

Source: AP Photo/Andrew Harnik

Arguably the most important passage of Walter Isaacson’s book, The Innovators, was something that readers largely glossed over. In his history of Silicon Valley and the geniuses who made it, Isaacson noted that the initial wealth behind these technological iconoclasts was of the Rockefeller, Vanderbilt and Phipps variety.

Behind every artistic and political movement there are rich patrons. And the same is true when it comes to every commercial movement. It cannot be stressed enough that entrepreneurs are doing things rejected by established thinkers and doers, and since they are, they require investment from those with the courage and money to be stupendously wrong.

That’s where the superrich come in. Since they possess endless, "dynastic" wealth, they have the means to lose enormous amounts while backing the visionaries eager to rush the future into the present.

On the other hand it’s a known quantity that the merely rich, or the relatively well-to-do “ten percenters,” account for the vast majority of equity ownership. Notable here is that the wealth situations that can be found in the “ten percent” are extraordinarily varied. Within that 10 percent is quite a lot of wealth that cannot be lost. Call it “millionaire next door” wealth to paraphrase the men who wrote about it in book form, Thomas Stanley and William Danko. Crucial about these millionaires is that they got that way by very carefully and methodically saving, and directing those savings into established companies with somewhat predictable income streams. And there’s nothing wrong with that. This investing style is called “wealth preservation,” and it’s what prudent investors who are part of the 99.9% pursue.

Yet the problem with wealth preservation style investing is that it rarely authors big leaps. Again, it’s being directed toward the great companies of the present. This is all well and good until it’s remembered that the big, totally transformative leaps are a consequence of surprise. If readers aim to understand this better, they need only ask themselves if they were “demanding” Amazon before Jeff Bezos, iPhones before the late Steve Jobs, and drivers at the touch of a smartphone button before Travis Kalanick.

If not, but if you love all three advances, then you love filthy reach people.

In particular you love the .01 percent. These are the people who can measure their wealth in the very high eight figures, but more realistically in the nine and ten figures. They’ve got so much money that they’re willing to direct some of it toward the dreamers aiming to recreate tomorrow. They’ve got ideas that have never been tried, and precisely because they haven’t been, skepticism about them is very high.

As an example of the above, Silicon Valley is littered with VCs that passed on the idea of a GPS for individuals (try living without one for a day or two now), along with companies like Google and Facebook. Lest readers forget, Peter Thiel was able to purchase 10 percent of Mark Zuckerberg’s social network for $500,000. Thiel was able to buy a big piece of a company that most VCs expected to fail because he had a massive fortune burning a hole in his pocket thanks to the success of PayPal. Thiel had $500,000 to lose.

Rich people, and realistically only staggeringly rich people, have the means to drive progress. They do because they have enormous amounts of unspent wealth that they can be creative with, rather than buying an S&P 500 ETF, or a blue chip corporation like Disney, Nike, or McDonald’s.

Which brings us to a report from the Washington Post's Jeff Stein that top Republicans close to President Trump “are exploring whether the president should campaign for reelection proposing a 15 percent tax rate for the American middle class.” Translated, Trump’s top advisors, many who are ardent supply-siders, have leaked to Stein their interest in having Trump run for reelection with a Keynesian tax cut as his signature economic policy idea. That’s too bad.

Trump administration insiders are taking a page from John Maynard Keynes ahead of Election 2020. That’s what a middle class tax cut is. Since middle earners have bills to pay and consumptive needs to fulfill, a tax cut for them is “extra money in their pockets.” Nothing more. That’s all well and good, ideally everyone would pay fewer federal taxes, but let’s not mistake middle class tax cuts for growth oriented cuts, or even as being really good for the middle class earners. Since they don’t earn much, tax cuts like this don’t change what they take home very much.   

What’s good for middle earners is the creation of brilliant new companies that will have substantial hiring needs, and the essential point here is that that middle class tax cuts do nothing to stimulate either outcome. They don’t because middle earners will most likely consume the extra funds not withheld by Uncle Sam.

As for the rich, they once again invest what’s left over after the feds take their cut. Since they don’t have any major consumptive needs that aren't already being fulfilled, tax cuts for them amount to unspent wealth that they can be creative with. Yes, they can lose money on investments in the ideas of tomorrow. Except that some of their investments will bear fruit on the way to amazing new companies, industries, health advances, and technology, not to mention exciting new jobs for those not worth hundreds of millions and billions.

In short, if you want to boost the economic chances of middle earners, reduce taxes on those who have exponentially more money than those in the middle class. They alone have the funds to invest.

Supply siders talk a good game about taxes raising the price of individual enterprise, and they’re right. But what they leave out is that a much, much bigger barrier to individual enterprise is a lack of capital. Yet when given the chance to shape Trump’s 2020 economic policy plans, supply siders are calling for a tax cut that will do next to nothing to increase capital formation.

They’ll argue that a tax cut for the rich isn’t politically palatable, but then Trump will be billed as a water carrier for the rich no matter what he proposes. In that case, go for huge tax cuts directed at those with the most to invest, and by extension, those most capable of improving the economic chances of every American.

If the media will tag your man as a non-traitor to his class no matter what, then it’s probably wise for your man to go for broke with tax cuts meant to substantially help his class. The tax cuts Trump may propose won’t drive growth at all. Keynesian tax cuts never do, even when they’re drawn up by growth-oriented supply siders.

This article originally appeared on RealClearMarkets.