As we enter the final stretch for the presidential elections in November, all manner of datais being thrown around trying to make one candidate look better than another. Harris is accused of handing out more presents than Santa Clause. Trump wants to cut taxes on the rich and hose the working class with the country’s oldest tax, a tariff, on imports. Is there any rational way to look at this?
In terms of tax policy, yes. According to the Committee for a Responsible Federal Budget, or CRFB, Trump’s plans to cut taxes, increase military spending and carry out mass deportations would cost $7.5 trillion over the next decade. Harris’s plans for social policy spending, middle-class tax cuts and tax increases on corporations and high-income individuals would total $3.5 trillion over the same time frame.
For the sake of perspective, we are now at $28.3 trillion in government debt. If neither candidate’s tax and spend strategy were to be adopted, we may still be projected to increase the government debt by $22 trillion in the next 10 years just by demographics (Social Security and Medicare), higher debt service and inflation. In the fiscal year 2023-24 ending September 30, the Federal Deficit is estimated to be $1.8 trillion.
A debt scorecard reads something like this:
| Administration | Today | 2034 |
|---|---|---|
| If nothing changes in taxes or spending: | $28.3 trillion | $50.3 trillion |
| Under Trump’s Proposals | $57.8 trillion | |
| Under Harris’s Proposals | $53.8 trillion |
It should be obvious that neither proposal tries to balance the budget. Quaint idea that. The Federal budget has not been balanced in 24 years. The original idea proposed by economists like George Keynes, was to have the government generate surpluses in good years to pay for deficits in recession years. Politicians of both parties have ignored this rule.
Realistically, imposing economic shocks such as raising taxes or cutting government services on a scale necessary to balance the budget could be financially catastrophic. However, there may be one area that can raise revenues without greatly impacting the economy. Tax the transfer of wealth.
Taxing estate distributions would not be the same thing as taxing estates, which would no longer be done. Instead, those who receive distributions from estates would be taxed either as income or at some other rate. For those who inherit assets with low cash flows, the tax could be paid over several years (with interest) at the option of the taxpayer. To avoid estate distribution tax avoidance, the tax would be paid by trusts and charities. The tax would not apply to limited gifts made prior to death so long as the donor has no control over the same.
The numbers are compelling. According to the July 19, 2024, World Economic Forum, there will be $84.4 trillion of wealth transferred in the next 20 years. At a 25 percent rate, that represents over $21.1 trillion in potential tax revenues, almost enough to pay down the debt to date.
Such a distribution tax may not impact the person who created this wealth. It may only impact on the parties who stand to inherit it. Since none of us get to choose our parents, such wealth received can be seen as almost as winning the lottery. As lottery winnings are taxed, so should distributions. As children of the affluent, advantages in schooling, social, and the like will not be taxed. Such are the benefits of circumstances not everyone has. The transfer of wealth from those who once earned it to those who did not is different. As now, surviving spouses may have unlimited estate exemption.
The argument against this tax on transfers is usually some variation of the “family farm” tale. Farmers are asset rich and cash poor. Farmers contribute to society by raising food so that we do not have to do so, etc.
The problem with this argument is that, when enacted into law, it seldom has a limit on farm or business size. Thus the “family farm” rubric has been used to justify estate tax exemptions far larger than the typical farm. Since the public accepts the “family farm” argument at face value, it does not get challenged as it should be.
Unless one generation is trying to control another with its wealth (think of the character “Big Daddy” in Tennessee William’s Cat on a Hot Tin Roof), there is no rational reason against having each generation earning to different extents their own way in the world. When they do not, the results are potentially extreme social stratification and less social stability and mobility. It was Supreme Court Justice Oliver Wendall Holmes Jr. who once said that taxes are the price we pay for civilization. Compared to the cost of security and private armies in some parts of the world. Protecting the assets of the haves, against the have nots, such a tax may be a bargain.
The Economy
Economic activity continues to plod along. An effort by China to stimulate its economy has resulted in a sense the effort was not great enough to have an impact. As the world’s second largest economy, China’s malaise effects the rest of the world, including the US.
There has been some loosening of the job market. However, with wages not keeping up with items like groceries, insurance, housing expenses, pressure on the consumer continues to persist.
Inflation
Inflation was seen as declining enough for the Federal Reserve to cut interest rates by half a percent last month. More recent data suggest that, due to the two major hurricanes in as many weeks, inflation may be in a state of revival.
Hurricane insurance in Florida, a state program, is viewed as all but bankrupt. Property insurance in general is slated to increase double digits after an estimated $100 billion in hurricane damage from the two storms. Food price inflation has begun to climb again due to port shutdowns and drought in Brazil. All this is putting more pressure on prices, which the government is powerless to prevent.
Interest Rates
Interest rates like inflation seem to be rising after a decline last month. The ten-year interest rate on government bonds crossed over four percent after being below just before the Fed cut interest rates in general. Mortgage applications for new loans and refinancings have plunged as a result.
The movement of the bond market has cast a question of just how much the Fed can control interest rates with cuts going forward. If such doubts become more common, investors’ faith in the ability of the government to direct the economy may become less certain.
The Stock Market
Stocks enter the third quarter of earnings season at high valuation levels in general, making them vulnerable to any disappointment.
Certain technology stocks carry a burden of proof that their prices are worth their projected earnings growth. For some if not most, this may be a bridge too far.
Warren M. Barnett, CFA
October 14, 2024
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