Peter Morici vs. Ralph Schlosstein: The Election's Impact on the Macro-economic Environment

It’s hard to ignore the fact that Trump has been reasonably clear about what he would do about Tax cuts, absent of how he would do it. Hillary’s priorities have also been quite clear, such as infrastructure spending, but we’re likely going to have a fairly substantial infrastructure spending regardless of who wins.

Hillary has mentioned a higher tax on incomes above $1M and $5M and increasing the estate tax from 45% to 65%. However, the likelihood that any of these changes are ultimately enacted is low.

With Trump, we’re probably looking at a Reagan-style tax cut with flatter structure, less deductions, and more simplicity overall. It’s extremely difficult to have a tax cut that’s politically palatable and it’s tough to have one at all since the country is growing so slowly. With Trump, Peter expects to see a very moderate tax cut paid for by programs that Trump would be forced to accept.

Peter likened Trump’s campaign to Obama’s ’08 campaign: not much of a plan and many generalizations; saying he would be the second outsider in a row.

On the subject of personal income tax, Peter pointed to a Green Room that stated how the U.S. could have a 60% personal income tax at the highest levels, and it wouldn’t affect productivity…”if that’s true, I’ll be playing shortstop for the Mets next year.”

Ralph believes there is pretty close consensus between Democrats and Republicans in congress that the corporate income tax has to be lowered to keep the U.S. competitive. Hillary hasn’t spoken much to this issue, but he could see her pushing for something as low as 25% or the 28% that Obama has proposed previously.

In Peter’s mind, Clinton has to be aware of what’s going on in Europe and how they’re cutting corporate taxes. No matter who’s elected, we’ll be competing against countries such as Great Britain and Ireland, whose corporate income tax policies are far more favorable, to recruit major corporations.

Ralph believes that a change, should it ever make it to the floor, would probably be able to get through the House. However, everyone wants that to come as part of a larger tax reform package and that’s what makes this so difficult.

Both Ralph and Peter agreed that if carried interest ever gets taken away, it’d be near impossible to get back.

Peter alluded to a “golden moment” that Obama had to change this when he had a 60-vote majority to pass Obamacare and we needed a source of revenue at the time. Carried interest reform could have been that source, but Obama went after investment income that doesn’t pay the social security tax instead.

That being said, Peter wasn’t sure if the revenue increase would have been enough to cover the costs, and called out that Obama and Clinton take in way too much money from people who don’t want carried interest to go away, so they’ll never actually be able to do anything about it.

Ralph candidly stated that he doesn’t know Hillary’s position and that she probably hasn’t taken one. 

However, Ralph elaborated for Hillary a bit and doubted that she would ever actually push forward with an effort to reduce deductibility. He believes that removing or reducing the deductibility of corporate income tax wouldn’t just raise the cost of debt capital, but it would have a negative effect on equity markets, and it would hurt multiples.

Ralph pointed to the efficiency and liquidity of our capital markets as one of our greatest competitive advantages and anything that could hamper that is probably bad policy. Further, access to capital in the US isn’t just a public markets phenomenon; “the supply of private venture money from people like Edison, doesn’t exist in other countries.” 

Peter doesn’t think this should ever be up for discussion, that any change is simply bad economics.

One of the more interesting points of the day came when Peter described present day America as a period of American capitalism akin to that of just before the civil war, pointing out that all of the great things that happened in that era were from small companies creating the Industrial Revolution and reaping those benefits for the American economy.

Bridging that back to the present, he pointed out how we constantly ask ourselves "why IBM isn’t doing that? Well, they aren’t because of their bureaucracy.” Peter’s belief is that there are fewer startups due to the unfavorable tax and regulatory environment, and that having an environment conducive to innovative new companies is one of the most important responsibilities of our government. 

Ralph believes we need to move away from the culture of opposing parties thinking the elected president is the scourge of the Earth, and that this has been the case for the last 16 years. Dan made a good point that it may be impossible to reverse this trend with the two current candidates.

As for Hillary, Ralph’s view is that she wasn’t seen as someone that can’t work with the other side until she had presidential ambitions and that light was cast upon her.

Along a similar line, Peter feels that in order for things to change, Congress and Washington in general, need to learn how to disagree amicably. Instead of ostracizing the other party, they should be able to dine with the other side and actually communicate with them. Peter was quick to mention Obama’s unwillingness to do this and even spoke from a personal account around how Obama’s administration has treated him as if he’s “morally flawed.”

Peter’s parting words on the topic were that we have to remember that we’re no longer living in the same era as Nixon & Johnson. There weren’t many crazy people on the Hill then, but that’s no longer the case, which Ralph, Dan and the rest of the room agreed with.

Unlike Peter, Ralph gave a concise answer on the topic, “Yes.”

He believes that an economic downturn is unavoidable due to the volatility of this election and the fact that it’s been nearly ten years since the last downturn.

Peter pointed out that we’ve been moving toward slower growth as a norm in the US. He also pointed to the large swaths of the population that struggle to participate in the new economy, and that the government hasn’t figured out how to assist them while also encouraging them to develop the skills to move out of lower classes. He feel’s that Hillary’s policies will only build on this trend, but that Trump doesn’t have a clue about what to do in this regard.

He is also anxious to watch the Clinton administration, should there be one, blame the next financial crisis on George Bush.