Odd Lots - The Big Tax Hike Coming in Just Over a Year

Episode Date: October 3, 2024

In 2017, Congress passed the Tax Cuts and Jobs Act, which may be better known as the Trump tax cuts. Due to the way fiscal policy works in the United States, a large component of the bill was temporary. And starting in 2026, millions of households are due to see higher taxes if the bill isn't extended or a new one is passed. Regardless of who wins the presidency, dealing with this tax hike is going to be a key political issue. But what is the TCJA? What was the idea behind it? And what happens if it expires? On this episode of the podcast we speak to Kevin Brady, who was the architect of the bill as the former Chairman of the House Ways and Means Committee. We discuss both the economics and the politics of passing tax reform, and what Brady hoped to accomplish when he created the law.Read More: Trump Tax Cuts Would Cost More Than Almost All Federal AgenciesSee omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast OddLots on Amazon Music. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lott podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, can I say something that I think is a little silly about U.S. politics or U.S. policymaking? What an intro, Joe. The answer is always. So I'm sure there's plenty of things about our U.S. system of government that, you know, could be improved upon in theory. But I'm aware that for various rules that exist in D.C., we often pass these laws that just, like, expire.

And I think it has something to do with, I don't know, reconciliation and the deficit and the filibuster and all these things where you pass a law and it seems fine, whatever. And then if you don't do anything, it just goes away in 10 years. It actually seems very hard to pass a law that has any sort of permanent, especially if it changes to government spending or taxation. It seems very hard to make permanent substantial changes to our fiscal policy. I have to say, when you mention it's been 10 years, that's kind of amazing. So you are specifically talking about the 2017 Tax Cut and Jobs Act, aka the Trump tax cuts. Those went into effect in 2018, and many of the cuts are scheduled to expire at the end of 2025. So by 2026, if we don't have any change, if we don't go about, you know, doing it all over again, then we could see tax increases.

Right. Like currently, if nothing happens, if we were to get sort of gridlock after November or just nothing happens, there is this tax hike that is existing loss as starting in 2026. believe some taxes are going to go up. I don't know exactly what they are. We'll learn what they are. But yeah, right now we're on course for tax hikes. Now, every politician, I think on either side of the aisle would probably say at least for some constituency, some income groups, we don't want this to happen. We don't want taxes to go up for Americans earning less than $400,000. That's something Democrats say from time to time, things like that. But it doesn't matter if every side doesn't want it to happen. You still need some sort of compromise law to replace the existing law. And there's no guarantee of that because politics is politics. And so as of right now, yes. So it is A, something for

people to recognize. And B, I think it's also important to understand what is the existing tax code? What did we change? Why did we have this change under the Trump administration? I find the process of actually designing tax policy really interesting. And I have a lot of questions. And a lot of it stems from my first ever encounter with U.S. taxes. I was living in London at the time, so I had to file things like the foreign earned income exclusion and stuff like that. And I remember receiving this like 400-page book from the IRS

on how to do your taxes. And it would say like for Box 78A, turn to page 328, and I would turn to the page, and there would be nothing there of relevance. And I remember sitting on the floor of my living room London and crying over this paperwork and this like admin that I had to do. So America's tax system seems incredibly complicated to me. I don't even know how you start to make changes to it. And I am very interested to learn. Well, I'm happy to say we literally have the perfect guest

because we are going to be speaking with the architect of the Tax Cut and Jobs Act. former chairman of the Ways and Means Committee, Kevin Brady, it's a senior consultant now at Aiken Gump. Kevin Brady, thank you so much for coming on Oblobs. Joe, thanks for having me. This is exciting. We're really excited about this. What do we start at that, you know, politicians come in, they say we're going to cut taxes, right? We've heard it forever. And Trump was no different in that respect. But there's a difference, I think, maybe between saying we're going to cut taxes and the idea of comprehensive tax reform that affects both households, that affects. corporations, et cetera. When you went, you're considered to be the architect of the TCGA, when you went

into this project of reforming the U.S. tax code, which I believe was the first time the tax code was reformed in over 30 years at that point. These things do not come. The stars do not align often for this. What was your goal? Yeah. So our goal, again, thanks for having me. But so the goal was pretty clear because we had a tax code that was obsolete compared to the rest of the world on the way, how, how, how, how business has competed. Internationally, our code was a relic from the Kennedy administration. If that part of the code were a person who was eligible for AARP, and as a result, other countries had passed us by. Their corporate rates were better. They were driving a modern tax car. We had a whole old clunker. We're a big economy, but we couldn't keep up. So as a result of the highest corporate

rate at the time in the world, in the obsolete tax code, you know, we were falling behind for a decade before 2017, growth was really slow in America, 1.5% average GDP growth, way low. Paychecks were stagnant for the decade. And as you may recall, about every other month, there is another U.S. company picking up routes from the U.S. and moving overseas or bought by a foreign company, even though we were the bigger factor there, moving headquarters and employees overseas. So, you know, we had to act, Ways and Means Committee, Republicans actually worked eight years to be ready to do tax reform. And I credit former Chairman Dave Camp from Michigan and Paul Ryan, who later became a speaker, the work we did for all that time, ready for,

prepared for someone in the White House to lead on tax form. And that's what happened in 2017. So these type of tax changes, you know, going back to my earlier point about the complexity of the U.S. tax system, and maybe it's outdatedness, as you put it. Does the ambition start at the policy level? Is it there are particular things in the code that we think are maybe stupid or irrelevant or old fashion? And so we need to start focusing on those. Or does it start with a general desire to lower taxes or reform the system? and then you kind of work backwards to the individual policy level? Yes, so the answer is the big goals and then you work backward. For example, we specifically wanted a tax code built for growth, growth of jobs, paychecks, and U.S. economy.

We wanted to redesign the international code so that it would leapfrog America to among the most competitive economies. But we wanted to make sure, we wanted to do it in a way where our U.S. companies could compete and win anywhere in the world, including at home. When they did compete and win overseas, bring those dollars, make it easy for them to bring it back, invest in the U.S. The old tax code said, no, don't do that. And we wanted to be, to drive innovation, because whatever country wins the innovation race really wins the future, I think, economically. And we wanted to make America the most desirable place for that new plant, that new research, that new intellectual property. So

those were the bigger goals. And then we wrote, to those. And one of the lessons we'd learned during the eight years as we laid out drafts of what we might do is that we realized, especially in 2017, we had to go bold because we only get, this only happens, as you said, Joe, once a generation, really. And so you can't miss that opportunity. The other thing we learned is the bolder you go, the more people are willing to give up parts of the old tax code to drive a new modern, faster, better performing. tax vehicle going forward. So we took lessons we'd learned into the whole tax debate. I want to get in, obviously, to some of the philosophical questions and about the questions of what a pro-growth

tax system looks like. But before we do, what don't you just lay out the sort of bullet point versions of what the TCGA did and then what specifically is set to expire and would revert to in the next few years? Because I know not some of it is actually permanent. Like the corporate side is not going to. change. But why do you just sort of give us the bullet points from 2017 and what could reverse? Yeah. So it is different 2025 than it was in 2017. So really the focus had to begin with growth, you know, because our economy was so slow and competitiveness, because we had fallen so far behind. So that's why focus was on dramatically reducing the corporate tax rate because... 35 to 21% to 21, which really put us, we were dead last. We moved into the middle of the pack.

but the redesign of the International Code made us very, very competitive. And so 21% puts us in the middle of the pack for our major foreign competitors at 21%. We could have gone lower in that regard. In fact, President Trump wanted to go lower there. But what we thought that would perform very well, and it did. We lowered taxes on individuals across the board. Our taxes are high. They had been growing since the Reagan.

tax cuts and so our job was we believed if you give families workers and small businesses you know more control over their earnings one you know they get to live their dream not the government's dream and the economy is going to grow and so we we did some some big things i think on the middle class tax cuts we created the first ever small business tax deduction 20% for those what we call pass-throughs those are the non-corporations where the money gets paid by the individuals. You reduce the amount of state and local taxes that I can write off on my tax. Thank you.

Well, you're welcome. You're welcome. Happy to get out in New York as fast as I can. But yeah, can we talk about Salt a minute? Yeah, yeah, yeah. It's hard to ignore it. A lot of our listeners are very interesting. I know.

I know. So I should have come in under an assumed name, but you couldn't ignore Salt. It is the biggest single subsidy, I think, within individual tax code. It's worth a trillion two, trillion five, and we needed those dollars to pay for the middle class tax cuts for the most part. But here's what we did. So we took a look at it. It wasn't a red-blue thing at all.

In fact, Texas is one of the bigger users of the salt deduction because of our property taxes. Because of the property tax. Yeah, yeah. So what we looked at and we realized, you know, everyone's subsidizing everyone. You know, rural community cities, low and modest income, higher income, non-itemizers, itemizers. and so we arrived at a simple premise, which is, why doesn't everyone just pay their own state and local taxes? I mean, we choose where we work and we live. We have a choice in our elected officials.

Why is anyone obligated to help us pay? More importantly, why are we obligated to help pay others? Because half the salt deduction goes to households making a million dollars or more. So what we did was, and then use that money to lower rates across the board. So take a deduction from some, give it to many more. At the end, though, we compromised. Talking with the legislators in high-tax states, you know, it was really important. We preserved some of it.

So we took the average standard deduction across America, which was $5,000, and we doubled it. But then we didn't stop there. So we took the child tax credit, which was sort of limited at about $120,000. We took it up to $400,000, provide more tax relief. for people who were impacted by salt. Then we did away with the AMT, alternative minimum tax. Again, that's how people couldn't get, like in New York, New Jersey, couldn't even use the salt tax deduction, even those in place.

Then we changed the marginal tax rates all to make, we want lower taxes in every state, not red states, not every state. And so we made big changes to make sure we saw those tax cuts. And I know most people look at it and say, look, we just need to restore that. And I wouldn't be surprised if there's some give on that because we've got, we've got in our party as well. You know, we've got New Yorkers and New Jersey and California, Illinois, you know, Minnesota. Some Long Island Republicans getting a little bit. Yeah, yeah.

So look, that's fair. It's important to them. And so I think there's some pretty good discussions. I think you might see some relief. But here's the warning. It's really expensive. Yeah. And every dollar comes out of those middle class tax cuts.

So whatever you give there, you know, you've got to figure out. where to pick it up somewhere else. Yeah, plenty of people still feel salty about salt. Myself included, full disclosure. Okay, this reminds me, though, one thing I always wanted to ask about these is, did you have a particular tax model in mind when you started this process? Did you look at potentially other countries and say they're doing this right or they're doing this wrong? Or is it the case that because of the uniqueness of the U.S. tax system, there are no international comparisons that you can really make. There are tons of international comparisons.

Okay, good. We spend a lot of time, both the way they tax businesses that compete around the world and the way they tax themselves. And obviously, we were out of steps, especially on the international side. Very few other countries taxed you at home and taxed your business abroad. They taxed you at home. But we were doing both, and it was a problem. A lot of countries have value-added taxes, you know, that add more revenue.

beyond their income taxes. We were well aware of that. But I'm going to tell you what was driving this as a model. And you're going to laugh at first. But let me explain it to you. So, and why we did. So you heard us talk about getting 90% of Americans to be able to file on the back of a postcard. And you probably said that is a political gimmick. But in fact, that was driving our goal of simplifying the tax code dramatically. So getting rid of a lot of the tax code dramatically. So getting rid of lot of that complexity for some lowering the rates for everybody and creating more fairness and understanding of how we tax people. And our thinking was, look, for, again, there's people who would never be able to do that. But for a lot of Americans, you know, there is something

powerful about looking at 13 lines and saying, this is how I'm taxed. And almost all the neighbors that I can see, this is how they're taxed. And it also makes it harder for Washington to raise taxes because you actually know, you know what I mean, how you are being taxed. So the postcard drove what we hoped would be simplicity, fairness, obviously stronger growth as well. And on the business side, you know, our first proposal, which didn't make it all the way through, was to basically eliminate huge chunks of the international code and replace it with a border adjustment tax. which is basically a consumption tax that asks a simple question, do you sell your product or service in America? If so, everyone's paying the same rate.

It doesn't matter where it was made. It doesn't matter where it's shipped from. It doesn't matter who did it. Are you selling it here? If so, if you're U.S. or you're from France, you're paying the same rate. And so we thought, and the other big virtue of it is that for American companies, you took that tax off of products you're exporting and selling. You put it on those coming in.

So now we're more competitive compared to the VAT around the world. And in the simplicity of it, it was bold. I still think it's an incredibly positive approach on taxes. But we had a short runway to get all this done. Industries that import a lot, whether you're a Walmart or a refiner or, an apple or whatever, you know, they have real objections to it. We didn't have time to be able to sit through and work. And so at one point, we had to jettison what was one of the bolder, I think, more positive things. But that's the process, you know, Tracy, you were asking about.

It's, you, no matter what your dreams are, you got to get it through Congress. So tell us more about that process. What are the conversations actually like? Are you all in a room together, like yelling at each other? Are there, you know, phone calls at midnight? that kind of thing. So because we started so early, you know, it was just a continual series of meetings, listening sessions, discussions with the scorekeepers, like Joint Committee on Taxation, Congressional Budget Office. I want to ask you about that. Yeah, you got to figure out, you got to turn the Rubik's Cube to figure out, okay, if we do this and this, what do you get? Like, what kind of growth and who pays the taxes and what's the cost of all that? And so we had a long time to run through countless meetings.

meetings, briefings, bring an experts and all that. But in 2017, as we really started to get crunch time, all of that accelerated. And so we, certainly in the house, we started with this premise. We went to our house members and said, look, we're going to tear the tax code down to its foundation and we're going to rebuild it. So go back home and listen to what people, what's important in 2017, not the 1980s. Like, what is important to you? And then we rebuilt it. from that. And so lots, lots of meetings, a lot of listening sessions late into the night. We had the Ways and Means Committee members working. We brought them back for holidays. You know, had them work when everyone was on recess. A lot of it was listening because to other

members in briefing groups from D.C. and around the country, even though we didn't get Democrat support, you know, I briefed our Ways and Means Democrats, our new Democrats, our problem solvers. The trade unions sat down with them. We knew, I knew. I knew. they weren't going to be able to support this, but I wanted to hear what was important to them to figure out what might be the bipartisan areas that we can design to. And all that was hugely helpful. But the process, you're working with the Senate, the White House, constant media presence, lots of groups attacking or supporting.

It's sort of a hurricane, you know what I mean, of input as you're doing that. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews.

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It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your own. your podcast. I'm going to ask you a kind of political question. You can be as forthcoming as you would like to be on this question, but there's obviously a possibility that, you know, Trump wins in November.

And he says things in the media that I think probably people in D.C. like, wonder like, how serious is he? So, you know, like, and some things he says seem like quite bold. You know, he says he's talked on the campaign trail this time. No taxes on tipped income. I think he said last night, we're recording this September 26th. He's like, no, we're just not going to tax U.S. manufacturers. He says some things that are more make economists very nervous, such as massively increasing tariffs, which are attacks. And he says things that make people even more head scratch, such as, oh, maybe we can create a $35 trillion crypto coin and pay off the deficit. So what I want to ask you is from the perspective of a someone,

writing policy. How should people think about what he says publicly and translating this or taking it seriously? How seriously should we tell you? What do you tell us how we should interpret Trump? And then how these things maybe get molded into something real. Having experienced working with the president, both on health care, tax reform and in trade to some degree. So every day the press on the Capitol would asked me about the president's latest tweet. Always did. But I didn't pay attention to his tweets. I paid attention to his campaign promises

because I've never seen someone in the White House so focused on this is what I said we do. Have you done it yet? Because it matters to him. But the flip side of that was, you know, he was not wed to doing exactly that. So my advice always is take him seriously, but not literally because whether you're working

on taxes or trade, whatever. He's open lots of changes. He's listening to sort of that team of rivals discussion. You can shape, and we did in tax room, shape a lot of what were campaign promises into positive things, but not exact. Just one follow up on this. One thing that he does not, if a future Trump presidency does not really need the help of Congress on would be tariffs.

Yeah. And he's taught, he, he, to your point, he followed through with his terror promises from the 2016 election. And in the 2024 election, he's a much bigger tariff promises. And I have to imagine that you know a lot of people, particularly in D.C., who are, like, deeply uncomfortable about this, particularly corporate, anyone who trades internationally, et cetera. How is you, what are you telling them about the risk of a very different international trading regime under the next president? Yeah. So I'm not a fan of tariffs. I think they're incredibly damaging. You punishes America more than whoever we're trying to punish.

And, yeah, it is, I don't advise any president to go that route unless there is some very specific target you need to hit. But what I advise them in using the experience of his first term is same thing. Take him, he's going to use tariffs for a purpose, if not imposing them, sort of hammering people into coming to the table on issues. I think that's, he uses that threat fairly effectively. It is disruptive. I did have an impact on economic growth.

There's no, both the threat of withdrawing from NAFTA, for example, the major threats where the steel and aluminum filed through on in China, there's no question. It slowed growth and had an impact. And so would future tariffs. My advice is, again, take him seriously. He likes tariffs, believes that levels the playing field, and he's held that belief since the 80s. but that he also listens to the economic impact. You know, he's proud of his economy and he's open to arguments of how this hurts the very people he's trying to help.

Since you mentioned economic growth, how do you judge the success of something like the tax cuts? Because, you know, I'm aware there's a controversy right now over dynamic analysis or modeling. And it does seem hard to disentangle the cuts from a tax cuts. factors. So I'm and it does feel like, you know, you can kind of say like, oh, well, the tax cuts did this, but then you can argue, well, there were other things going on and that's why growth went up. So how do you kind of evaluate the actual impact? Yeah, as you know, there's lots of projections ahead of tax reform in the economy. There's lots of different data on it. We try, we try to use the government data as much as possible, you know, and we supplement it with lots of other studies and

different groups. Those are all very helpful. But we tend to rely on, so what are the numbers show us? And yes, there are always other factors. I think the relief on regulation played a pretty important part. I think in the economy overall, and you just have the economy in general. So we were always taking look at how much did it grow jobs, how much money returned from overseas, two and a half trillion. You know, we had innovations to do your intellectual property in America. We're bringing it back. Those revenues doubled. Really good outcome there.

Investment from businesses, big thing that drives equipment, that drives all this stuff. On average, went up 20 percent, really good numbers. Research did the exact same thing. And so watching the economic data, we were achieving much of what we had hoped for. The one element, 2019 to me was the most fascinating year. We watched it closely because the code had been in place one year. Now we could sort of see how it was working. And we know generally how an individual, like a corporate rate cut or research and develop,

how it will perform generally. But the question is, how does it all interact? You know what I mean? Like how does that, it's like a Formula One car. Right. If you bring an upgrade, how does it affect the rest of the performing? And so that's what I was following. 2019, a couple key things happened, I think, besides very strong economic growth.

One, real wages, I'm like ahead of inflation, grew more in one year than in the eight years combined before it. In fact, those first three years after TCJA, real wages, average 9%. That's the best three years on record. So paychecks were growing. Check the box. That was working really well. Poverty, you know, 2019 just plumbed. limited in a good way, but it did the most, made the most progress among the people who

sort of been left behind, people of color, those without a high school degree, disabled, young folks, got new opportunities. That was what we were driving for. And then income inequality began to shrink for the first time in 50 years, according to Larry Lindsay, Fed Governor and in the White House economic team, another goal of ours. And so, yeah, we were every year, a try. tracking what progress we're making and what provisions might not be performing as well as you want. You mentioned income inequality. I'm curious your philosophy about the role of progressivity in the

tax cuts. We obviously have a progressive income tax. And the more you make, the higher percentage of your marginal, you know, higher marginal tax goes up. A criticism that you get of tax cuts is like, well, a lot of the tax cuts benefit the rich. But of course, the rich pay a lot of taxes. So if you're relative to the poor, so if you're going to cut taxes, we all. know like on net where those dollars are going to flow. But just talk to us about your philosophy of the role that the tax code can play in the TCGA or just generally and thinking about the importance or unimportance, if that's your view of progressivity in the tax code. Yeah. So I don't think people realize how progressive our code is compared to other countries. If you just look at like

what is the top rate, you might say, well, it's more in France or somewhere else. But if you look at What's the share of taxes that each income group pays? We are incredibly progressive. And the top 1% in America today shoulder about 45% of all the income tax burden. That's unusually high for it. And the converse is true as well. Like the bottom half of income earners, what we would think is up to the middle class, shoulder only about a little more than 2% of the whole income tax burden.

And it grew after the tax reform. It grew a quarter for the wealthy. They picked up a bigger burden. It shrunk by a quarter for the modest and low income down to 2.3%. So we are, people are always surprised how progressive we are compared to other countries. Real quickly, and before we forget to do this, can you give us the bullet point summary of what happened? Okay, let's say 2020 election, 2020 election happens. It's political gridlock. They can agree on nothing. in D.C. What reverts and what doesn't? Yeah, so 2017 was all about growth and competitiveness. 2025 is going to be about the individual tax cuts. Do they hang around? And so all the individual marginal rates revert back to pre-2017. Those are an average family for, it's going to be around $2,000, roughly. Things like the child tax credit is going to shrink back. The standard deduction, which we nearly doubled, hugely popular. and now 90% of Americans don't have to itemize their taxes. They sort of love that.

That reverts as well. The small business tax cuts we created goes away. That's really damaging, I think, in a big way. Then things like the estate tax, we call the death tax, family farms and businesses, goes back to very few exceptions in a much higher rate. Things like Opportunity Zones, disappear. We create a new tax credit for paid family and medical, leave. So businesses that created those programs tailored to their workers could get some help

doing it goes away as well. And in some business credits, really important. Research and development expensing, expensing of your equipment, software, all of that, reverts to a very, I think, negative position there. So, yeah, $4 trillion or more of tax heights that it'll slam the economy. And neither party, I think, has anything to win by letting these expire, which is why you ask why something's expiring sometime. So I'm not going to just blame it on Senate budget rules, but I'm going to blame it on Senate budget rule because that's what did it. But our thinking was we locked in all the growth competitors because it's so important on paychecks and jobs. We left the more bipartisan issues. We believed Republicans and Democrats would want to.

keep the middle class tax cuts, the small business tax cuts, the child tax credit issues like that, where I think there'll be more common ground heading into 2025. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. episodes are published throughout the day with the latest information and data

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I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also, really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts. I want to go back to the inequality discussion because I take the point about progressivism and the idea that the wealthy in America are paying more taxes overall. But my impression is the more redistributionist countries that are out there, I guess. They don't necessarily have really progressive taxes,

but the difference is that the tax that they get, they direct more towards the poor. So I guess my question is, could we reduce inequality through something other than taxation? Could we just spend in a different way in order to... More focused way? Yeah, exactly. you know perhaps but we have a pretty poor track record of that unfortunately within our spending in the governments where that social safety net you know i think we're all really cognizant of you know we often discourage work in connecting back to the workforce in a lot of those when you put all that net together you know on average you know in a state like texas for that family

whether it's single mom or with a couple children, you know, those benefits start to add up. Like in Texas, we're a little stingy and all that. It's still close to $50,000 a year. In a Pennsylvania, it'll be 67,000 some thousand. So the problem is that you make it really hard for people to move off out of the social safety net. It's not in their interest to do it or it doesn't feel that way for them. And so part of our thinking again on the tax code was, let's reward work, you know what I mean, in a way that allows them and encourages them to move back into the workforce. That happened in TCJA, certainly not to the level we will need for the long term.

And COVID changed everything, sort of on labor participation and just changed the game that way. So one of the criticisms of the current, I don't know, current tax code is people talk about this phenomenon of buy, borrow, die. Wealthy people accumulate assets rather than sell them when they go up to enjoy the fruits of their increased wealth. They borrow against them. And that borrowing is tax free. And then they spend that. And then assets tend to go up like stocks over time. and then they die, and then they're bequeathed to their children, and the children get a step-up and basis such that they don't actually pay capital gains on the original purchase of the real estate or the stock or whatever. And so one thing that was for about a week, people were talking about

it was like, well, maybe we should have some sort of tax on unrealized capital gains. Seems very unlikely to me for all kinds of reasons. But setting that aside, are there still issues out there that seem structurally wrong, such as step-up and basis. And some of these other ways that the wealthy can accumulate assets without having a big tax bill before realizing their benefits. Yeah, you know, I actually don't see that as an abuse in the sense that, you know, we do that in our home equity loans. You know what I mean? We build up, we build up that value. We borrow against for something that's important. The value hopefully keeps going up. And, and, and, when we pass on, you know, we do get an exemption, and usually for us for middle class,

you know, they don't get hammered with the estate tax in any way. So I don't know what's wrong with borrowing against values you've invested in. And I'll tell you this to most of those investments come, I think, because, you know, our tax code, we try to drive investment. So, you know, when you earn a dollar, there's three things you can do with it. You can spend it, which a lot of us do. You can save, which is economically better, or you can invest. That's risky, no guarantee you're getting it, but is the most pro-growth of everything you do with that dollar.

And a lot of – we're trying to encourage people of every income level to invest more, save more, and invest more. Because usually it's good for them and super for the economy. me. And one of my concerns always is when you go after unrealized gains or, you know, tax hikes on the wealthy, you're actually taking those who are the super investors, you know what I mean, and our country are willing to risk everything to take us to Mars or, you know, in some cutting-edge technology that drives jobs and opportunity in such a big way. So I'm always really cautious about just picking that group of villains saying, you know, we need more of your, a fair share is how much your money you owe me. Yeah, I think economically, and for the U.S., it's really

the innovation and the investment. Our tax code's pretty good at this, driving that risk. So speaking of criticisms, we would be very remiss if we didn't ask you about one of the biggest ones, which is the impact of the tax cuts on the deficit. And I know there are all these different ways to measure this, but I think, you know, one fact that probably can't be debated is that under Trump, there was like $8 trillion of debt approved versus under Biden. I think there was something like $4 trillion. And I'm curious how you link those two things together. So the cuts and the deficit, and I guess, Joe, don't come at me, but are Republicans' MMTers now? Like, do deficits matter? Yeah, they definitely do. So sort of reset some things. Look, I think Biden's debt was much high. It's been averaging $2 trillion a year there. And certainly there was an impact from TCJ, but not nearly as much as people think. And here's why everyone is shocked when I tell them that we paid for most of the tax cuts up front. We didn't do a trillion-half dollars of tax cuts. We did $5.5 trillion because we needed to be that bold.

to get back in the game and drive the economy. We raised $4 trillion through reforms that paid for growth and for lower rate. And so on the day President Trump signed it, 72% of those tax cuts were already paid for. On top of that, we've seen huge revenue growth. For example, corporations now pay more to the government at the lower 21% rate than was projected at 35. I mean, growth really matters, drives a lot of revenues.

I think that one half a trillion, the congressional budget office quickly revised it down to about 1.1. We've seen more growth since. And unlike most tax cuts, you know, you can safely say for most tax cuts, you can recover about 30% of it. Generally, that's the rule of thumb. In this case, we recovered twice that to begin with. It's gone much higher. It did create deficits. No question about it.

but I think much smaller than most people ever dreamed we would do. Going forward, though, Congress is going to have to raise $4 trillion just to keep the current tax cuts. On the Republican side, this is going to be a real issue. Debts and deficits matter. It's exploded in a big way. And so I think especially if Republicans run the table, who knows how this works in November, I think there's going to be, especially in the House, some real serious discussions about how much, of these extensions are paid for? You know what do we do? What kind of other reforms do we do,

either in spending or the tax code itself, to lower that number? So no, I don't see us now moving to, you know, modern monetary theory, no matter what's said. I think it's, I think that's the biggest issue that worry most Republicans. I just have one last question. And you talked a little bit about this, where some of the goals you had in the beginning with related to international revenues and how they were taxed. And there are still some certain sectors of the economy, highly intellectual property oriented sectors like pharmaceuticals, maybe like something also still, you know, iPhones, etc. But pharmaceuticals, there is this sense of unfairness that Americans pay some of the highest prices in the world for drugs. And at the same time,

many American drug companies seem to pay fairly small amount of taxes with a lot of the revenue booked overseas. Is there still more work to be done? Let's say you had another crack at it and somehow the stars aligned. Is there still more work to be done in your view on getting that right? I think, let me just say this, tax reform was not perfect. Yeah, sure. We went through the political process. On the day it was signed, I had a thousand things I wanted to do differently. In my advice, too, to Congress now is don't just extend these and prove them. There's always room to do that. I think, you know, we went into the international with how do we become super competitive, but also how do you prevent companies from exporting their income to lower tax countries? How do you

prevent them from importing their deductions to lower their rates? It's complicated and probably more complicated than needed. We generally achieve that. Can you, can you do more in that regard? I think we can. But the outcome we noticed was one, it was much harder for companies to do it. Two, multinationals now are investing so much more in America than overseas. That's good. Yeah, we always ought to look at how we improve the international side of this. Is there room for more multilateralism when it comes to global tax regimes? Could you perhaps coordinate so that it's not a race to the bottom? You know, I really disagree with that, with the philosophy. Secretary Yellen, who I respect a great deal. I got to work with her when I was head of the Joint Economic Committee, you know, feel strongly about that approach. It seemed to me, you know, the last three years, America's really been trying to, you know, sort of coerce our allies into making sure no one can have competitive rates vis-a-vis each other. I think that's a mistake. I actually think.

the race ought to be to more growth, better paychecks, more competitiveness that way. And so, yeah, I think these international sort of cabals on tax are often a mistake. But if you're going to do it, here's a lesson from the last couple of years. If you're going to do international tax treaties and agreements, you've got to take both parties along with you. Because you want the agreement to stick, right? You want to have the buy-in from both parties. In the past, that was the case. not so much the last the current administration which is a shame because I think had both in and even

Democrats will say look there there hasn't been a lot of conversation to do international take the time to keep your folks with you I don't care Republican or Democrat in those conversations because you're going to end up for the better product and it'll stick all right this is my last question but it feels like no matter what happens in November we are all going to have to familiarize ourselves with the reconciliation process. Oh, yeah. Can you tell it? What should we know about that? What's the most important thing to remember? So Tracy, you had to go there. Reconciliation. Very triggering. I just slipped it in right at the house. Yeah, let me get the scar. Let me show you the scars on my back. So, you know, reconciliations use, it's a budget process. Both party uses them, usually for very important

things. They're limited, basically spending in tax issues, tax growth issues. Lots of complex rules, but the bottom line is a reconciliation budget, if approved by the House and the Senate, goes to president, allows that bill to pass with the simple majority in the Senate, but with a lot of rules to go with it.

So reconciliation happens first. So Congress has to agree on what the parameters are for tax reform or health care in the Affordable Care Act or in the Build Back Better or the Inflation Reduction Act. So that's the first step. It's not easy to do it if either. But here's the tip off. If either party runs the table, reconciliation will show us what they're going to do in taxes

or spending, you know what I mean? It will show you right up front what the guardrails are around this. If there is divided government, which most people think there will be in one way or the other, you won't have that. And so you'll sort of glean all that at the end of the process. So reconciliation is a runway that you land these major bills on. The House version will invariably look different than the Senate version because of these very different. difficult budget rules. The reason for years Republicans wrote tax reform to be revenue neutral

was that we could get permanence there, which to me the best tax code is a permanent tax, at least as much as you can get with the political environment that will change these. That's where you get the most growth, most certainty, the better outcomes, which is why it's been frustrating to in reconciliation we didn't get all of this, you know, permanent for the long term. But it is what it is. And it's a really an arcane process, but a really vital one. Kevin Brady, thank you so much for coming on to odd laws. That was really fun and very informative.

Well, thanks for having me and thanks for a really good question. Thank you. Complex issue. Tracy, thanks. Thank you so much. I stirred up the memories. We didn't start with that. Yeah.

Tracy, I found that to be very interesting. I really like hearing, just like even from a process standpoint or a philosophy standpoint of what reform of the tax code is, what reform of the tax code is within the constraints of the U.S. legislative process, I found that to be a very informative episode. It was really interesting. One thing I'll say is it very much reminded me of a conversation I had in a bar once. That's a good sign, I think, for any episode. Well, with a policymaker, and I won't say who.

But, you know, he was talking about how there's this tendency to think of there's an idea floating around that the U.S. doesn't have a very strong social safety net, at least when compared to, you know, some places in Europe or elsewhere. And he was making the point that there is a social safety net. It's just so much of it is embedded in the tax system rather than direct spending. Yeah. And I don't, you know, I don't necessarily, I'm a journalist. I don't have opinions. And I know, so I can't agree or disagree with the goals behind that. But I do think if you want to understand the U.S. economy, it's important to realize how big and complex and important the tax system actually is. No, and we could go a lot deeper on this even with like another episode, which is this is such a good point,

which is how much we rely on the tax code specifically refundable tax credits, et cetera, tax credits for people who don't pay any taxes. Home ownership. Like all of these things through the tax code, whereas like, you know, some things, like so, for example, people talk about child tax credits. You could, you could just, instead of talking about child tax credits at all, through the Social Security Administration, send out people, send out checks. Instead, you file taxes and you get money back. To former Chairman Brady's point at the end, it does sound like if there were ever some, even if we could ever agree on what an ideal tax system would look like it would be a never-ending process of sort of like asymptotically getting there over time.

And we're probably... Asymptotically is a good word. Thank you. Thank you. And we're probably theoretically many, many more things that could be done. Can I say one other thing? You know, I sort of enjoyed hearing this sort of like a certain, I don't know old-fashioned is the word, but I would say old-fashioned view of like, you know what, competitiveness,

cutting taxes, this is the path to growth, et cetera. it's certain, you know, it's certain old school vibes that I feel gets a little bit like you don't hear as much these days in conversations about growth. You hear a lot about industrial policy. Wait, I thought it was all about the vibes. No, it's just that specific thing of like, you know, let's cut the taxes. Yeah. Like, it's nice to hear from a believer. All right.

Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wisenthal. you can follow me at the stalwart. Follow our producers,

Carmen Rodriguez, at Carmen Erman, Dashel Bennett at Dashbot and Kel Brooks at Kel Brooks. Thank you to our producer, Moses Andam. For more Oddlots content, go to Bloomberg.com slash oddlots, where we have transcripts, a blog, and a newsletter. And you can chat about all of these topics 24-7

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