The Republican tax bill has passed and President Trump is taking a victory lap. But just who will emerge the most victorious from the coming tax cuts and could it push the U.S. economy to the next level? Kim Parlee speaks with Beata Caranci, Chief Economist, TD Bank Group.
- Thank you.
KIM PARLEE: This is a really big deal.
- Mm-hmm. Its total amount is $1.5 trillion over a decade. And even when you do what's called dynamic scoring, so how-- you get some offset from stronger growth and other aspects. It still leaves you with a price tag of about a trillion. So this is a big deal, but one that will continue to have to be paid back for future generations.
- You know, when President Trump was elected, we all talked about the Trump bump. This was the Trump bump. It was the investors saying, OK, if companies are paying not 35% but 21%, that means more money, hopefully, going to us. Tell me a bit about, in terms of when you look at this, how do the benefits get distributed throughout the economy, and what's it going to mean?
- So if you think about what they're reducing in terms of taxes, you almost-- almost, not quite-- 50/50 split between what's going on in terms of corporate income tax benefits versus personal side. So you and I getting tax breaks if we were Americans. On the corporation side, the tax rates going from 35% to 21% is a huge, huge shift. You're hard-pressed to find an economist who's not going to like that aspect, because the US really did have noncompetitive tax rates. They hadn't changed them well over a decade while all the other countries were coming down.
On the personal income tax side, this is where a lot of controversy exists. What they've done is higher distribution of tax breaks going to the higher-income individuals. So the people who are in the top 5% of income are going to see their after-tax income rise by about 4%. People who are on the lower distribution are going to only see about a 2% increase in their after-tax income. So much more going up. And what that means in dollar terms is about $13,000, on average, tax breaks to an individual in the top 5%, and about $900 in tax break if you're earning between $40,000, $50,000, and $80,000.
- The other thing I know, because I've spoken with you many times, and I listen when you speak to me, is that when the higher income gets the tax break, they are less likely to actually put that back into the economy. They're not going to spend it. They're going to invest it or do something different.
- Yeah, you know, they're flush with cash, and so they don't treat additional savings as something that they need to go out and spend. So it's called-- their propensity to consume is much lower out of every dollar of savings. So it will go through into investments and other aspects, as opposed to lower-income individuals who have a high need for basic necessities, or maybe doing the vacation they deferred, or other aspects-- new car, repairs. So that money tends to go almost immediately into the economy, and it has a much higher fiscal multiplier.
And so this is why when you distribute to the higher-income individuals, it tends to be saved. Where they do spend, they may spend on luxury items more, which tend to be imported. So you don't even get the same multiplier happening inside the American economy.
- But you'd have people also arguing the same point, though, with the tax rates lower than I think it's the OECD average, according to your report, that that maybe can attract more businesses to set up shop in the States. Maybe?
- This is the hope. What ultimately is the belief is that you, one, reduce inefficiencies that are getting created. So we know there's a lot of companies who set up shop elsewhere to avoid paying the higher tax rate in the US. And they maintain profits elsewhere in operations. And so that incentive should be reduced, and you will set up where it makes sense. And that could lead to higher investment in the US. This is the hope.
But it doesn't happen immediately. It tends to happen over time. Because businesses-- just because they wake up on January 1 with lower tax rate doesn't mean they're going to throw their previous business plan out the window. So it takes time to materialize. So really the impact would be bigger in 2019 than it would be in 2018.
- Well, let's talk about the impact on your forecast, because I know you came out with your forecast not too long ago and then said, by the way, when this happens, you could see this ratchet up a little bit. So is that what you're saying? You saw it move up more in 2019 than 2018 for the US?
- Yeah, so we put in about-- it's very small. It's a 0.3% increase in GDP in 2019 and about 0.1%, 0.2% in 2018.
KIM PARLEE: Why so small?
- Again, because we are in a mature stage of the business cycle, and so the economy does not need fiscal stimulus right now. And so people don't-- by the same token, don't spend as urgently as-- when you're in a recession, you really need the money. So you get a lot of leakage. You don't get the same bang for your buck at this stage. Also, the type of spending that we're getting, if they had put the money towards things like infrastructure spending, that builds out capital and improves productivity. You have much higher multipliers there than when you're distributing it to higher-income individuals.
- One thing you talk about here I think we have to mention is that-- I'll just read what you have. "An intergenerational shift of the tax burden to the future." So forget Generation X and Y. We're going to have Generation T for Tax. So this is-- the kids-- US kids are going be paying this for a while.
- Yeah, there are people who are currently not even in the job market who are going to be paying for this. So you know, teenagers, people in their 20s and even in their 30s. So what they did have to put in place is-- because it's ramping up the level of the debt, they have what's called sunset clauses, meaning much of the personal income tax breaks that are in existence as of next year will expire in the next 10 years.
KIM PARLEE: They don't expire, do they?
- Well, this is what the US is not good at. They don't actually execute on their sunset clauses. It's very rare.
KIM PARLEE: No one gets re-elected on an expiry.
- Right, because you're effectively-- people deem it an increase in taxes, even though you're moving back to where you were. So ultimately, they have to find a way to pay for this. And because the debt level's rising as a share of GDP, it's already on an upward trajectory. Now this is going to add to it. Someone's got to pay that back, and that's going to be the future generations. More and more of taxpayer dollars are going to go to paying the interest on this debt as we go forward.
And they also have an aging population that's putting pressure on their Medicare and Social Security system. And so that's what we say. When we say there's an intergenerational shift happening, it's that younger generation who's going to be paying for this for some time to come.
- You're living up to your dismal scientist piece right now. So yeah, no, but it's something I think people are very aware of.
OK, I want to shift gears, if I could, because you mentioned about the forecast. I've only got a couple minutes here. Wouldn't mind just some rapid-fire thoughts on this. US forecast has gone up because of the tax cut increases. You and I chatted and talked about a virtuous cycle that's happening in the global economy. What are you seeing right now in terms of forecasting on growth?
- Yeah, so we would have upgraded the US forecast irrespective of the fiscal stimulus, and that's because what we're seeing is it's not just the US. It's happening in Europe. So the eurozone forecast was upgraded. UK, which is facing and contending with Brexit, upgraded. Canada also upgraded.
So we're seeing, basically, all the amount of monetary stimulus that was pumped into these economies years ago and the legacy of the financial crisis now really behind us. You're now starting to see the benefits feed through. And so they're feeding off of each other, in many respects, off of that growth pattern. And you see it through higher trade volumes as well. So everybody is getting bumped up on the forecast.
KIM PARLEE: Canada?
- Canada as well. Canada had a great year this year of 3% growth. Going into next year, it will probably be around 2.4%. So slightly slower than that. But we have tremendous momentum happening in consumer spending, probably where the Bank of Canada would not like to see it, because there's a high level of indebtedness. But it's holding.
It was originally fueled from the housing market and that wealth effect. It now looks like it's switching into wage drivers, meaning we had a substantial amount of full-time jobs created in 2017, the highest we've seen since basically 1999, 2000. And that bump up in wages and wage growth is now feeding into the consumer cycle.
- I'm asking you one-word questions. NAFTA? I mean, does that just negate everything, from a Canadian perspective, if something happens?
- It's a huge risk. Huge risk. So we did some analysis on this front. And if NAFTA is torn up, and if we go back to WTO, most favored tariff, country tariffs, that would mean you're going to have price impacts of 2% to 3% across the board happening. It varies by industry, but that's the average.
And when we assessed it, we think it will shave GDP by about 70 basis points, which basically means that you would be somewhere at around 1% to 1.5% growth for Canada. Which doesn't seem horrible, but it's a very difficult thing to model. And what we think is you'd probably have 2/3 of the negative impact coming not through the trade actually through confidence. So we think there'll be a substantial financial market shock happening in the stock market and currency markets, business confidence and consumer confidence. So we're saying maybe 1.5% growth, but it could actually be-- the risks are skewed to the downside, to those numbers.
KIM PARLEE: All right, 30 seconds. I have to ask about the provinces. Ontario?
- Ontario, for next year, will look similar to Canada in terms of the growth.
KIM PARLEE: And with NAFTA, disproportionately?
- And NAFTA, it is-- Ontario's disproportionately impacted, because it has a much stronger trade tie to the US than, say, British Colombia, which has more trade oriented towards Asia, in particular.
KIM PARLEE: All right. And the east coast of Canada, just a little bit lower?
- A little bit lower. It's more like in the 1% to 1.5% range.
KIM PARLEE: All right. You tried to make that sound better, but it is what it is. Beata, thanks so much.
- My pleasure.
KIM PARLEE: Beata Caranci, Chief Economist at TD Bank.