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I swear it’s not. And it’s not about pissed-off Canadians either. If you are Canadian, I can understand why you’re upset, but don’t cut off your nose to spite your face and vote for Mark Carney. I can see you’re trending in that direction. Then you will have the per-capita GDP of Namibia. I hear Windhoek is beautiful this time of year.

No, this newsletter is about taxes because after President Trump gets done with tariffs, he’s going to move on to taxes.

I teach personal finance at the university level, and I just got done with my class about taxes. I go through the tax brackets with all the marginal rates, and we compute effective taxes. I then talk about Social Security taxes and Medicare taxes and state taxes and capital gains taxes and dividend taxes. By the end of it, I think the kids are left with the impression that we pay an ungodly amount of taxes… because we do.

Enter Trump

I honestly have no idea what Trump’s going to do with the tax code, but it’s not going to be an inconsequential reduction in marginal rates like we got in 2017. It’s going to be big.

I think it’s going to be a flat tax, or something approximating it. That’s what Mr. Grover Norquist is agitating for. Of course, a flat tax is going to make a lot of people squeal because it will require lower-income people to pay more and higher-income people to pay less, which offends our class warfare sensibilities. 

I should remind everyone that in the Tax Reform of 1986, under President Ronald Reagan, we were left with two tax brackets: 16% and 28%. The cutoff was around $90,000 in today’s dollars. He also obliterated pretty much all the deductions and credits and loopholes.

Counterintuitively, tax revenue went up, and the economy boomed for the next 14 years, aside from a small blip caused by a commercial real estate bubble. When people were getting excited about Trump getting re-elected, this is what they were excited about. But like I said, I honestly don’t know how it’s going to turn out.

Hard to Be Bearish on the US

Some people tell me that lower taxes are inflationary, and that is the absolute dumbest thing I have ever heard. We will leave it at that.

I am excited by the prospect of paying $100,000—maybe $200,000—less in taxes a year. I mean, what could I do with that money? Maybe I will pay down my mortgage. Maybe I will donate it to charity. Maybe I will buy clothes and jewelry. Maybe I will pay a guy $100,000 to do jumping jacks for 24 hours straight with a bottle of shampoo in his pants. Pretty much whatever I do with it will be better than giving it to the government to spend. 

You’ve probably seen Rand Paul’s Festivus rant about all the dumb stuff the government does with taxpayer money. Quick story: Do you remember when the government spent $780 billion on stimulus during the financial crisis when Obama was president? There were all these Keynesian economists running around, assuring us that there was a “multiplier” on that spending, that the economic impact would be massively larger. 

Well, some economists went and figured out what the multiplier was on that spending: 1.03. We spent it, and it was gone. If you let people keep their money, and they spend it on picture frames at Target, or even buy a stock or a bond, or invest in a business, it is going to have a multiplier that is much better than paving the same roads over and over again, which is pretty much what we did in 2009. At least we had some great roads.

And that is economic growth. It’s hard to be bearish on the United States right now. I am a tad bearish on the stock market, but I’m not bearish on the economy (I promised I wouldn’t talk about tariffs). 

If we lower these taxes and make the tax code less progressive, it is going to unleash a hurricane of animal spirits. I will be the first to admit that trends trend. We haven’t had a real recession in 17 years, and we probably won’t have one anytime soon. Flying cars and everything. It’s going to be incredible. 

Admittedly, the economy did pretty well under Biden… in spite of Biden. That’s because the United States has become one giant laboratory for entrepreneurship, mostly because we are the cleanest dirty shirt. You don’t want to start a company anywhere else in the world, and Biden, for all his faults, did not kill off entrepreneurship. He would always say, “I’m a capitalist, but…” and everything after “but” was crap, but at least he said he was a capitalist.

If we go through this exercise and lower the top rate from 37% to 35%, and that’s it, this will have all been a waste of time. Let’s blow it up and start over.

Jared Dillian, MFA