New Tactics for Old Neighbors

Scott Gilmore gets it mostly right in his piece "Trade sanctions against America won't work. Sanctioning Trump himself might. Instead of taxing American goods, Canada and the western allies should collectively pressure the only pain point that matters to this President: his family and their assets"

source: cbc.ca

Gilmore recounts the many above board efforts by traditional U.S. allies France, Germany, and Canada which failed (and subjected their leaders to varying amounts of humiliation in typical Trumpian style.)

He points to Ukraine, China, and Qatar who know how to work with Trump with sweetheart financial deals for his family, and asserts that " the western allies understand that if we want the U.S. to do something we must negotiate with the man himself. What we have not grasped yet is, as strange as it sounds, the President of the United States is more concerned about promoting his interests than defending America’s."

Actually, I would argue that the western allies are not so stupid. They all surely recognize, as do most Americans, that Trump cares almost exclusively only about himself and, to a lesser degree, because he knows he is mortal, his immediate family. However, western allies have felt compelled to try traditional means as a first attempt, because resorting to measures likely to be effective against Trump requires a dramatic departure from normal behavior.

And Gilmore correctly says that a Magnitsky Act type of response is required. Makes sense. When he are confronted with an oligarch, hit him in the only place he cares about.

The author continues "Canada’s Special Economic Measures Act and the Foreign Corrupt Officials Act permit us to sanction public officials who are 'complicit in ordering, controlling or otherwise directing acts of corruption'. In the case of Trump, we already have several open examples of this and the various ongoing criminal investigations (of his own government) are expected to produce many more."

So far so good. Then, where does Gilmore fall short? It's in his own self doubt about this modest proposal, by saying "I recognize this column has the stench of bad satire about it. I am sane enough to know this proposal does not sound sane."

No. No. No. No. No. Reporters and columnists - Please stop doubting yourself when you are right. Trump has spent a lifetime turning such self doubt and normal behavior by adversaries (and unless you are part of the inner circle of family and fixers, you are an adversary) to his personal advantage by responding with deeply antisocial behavior.

One problem is that the self doubt is a contributing factor that makes the author stop there with his proposal. Since we are recognizing the power of the personal - What if Canada started to slow walk border crossings by U.S. citizens to and from Canada. This would have an immediate negative impact on corporate travel by white collar Americans, and affluent tourists,  as opposed to the delayed and less direct impact of tariffs. We saw how upset Americans were with the Muslim travel ban at the start of the Trump regime. Imagine how upset corporate America would be with this. Sure, they are happy with the corporate tax cut and the personal tax cut on high incomes, but this could shake some of the complacency around the erroneous view that the problem of Trump is one of style, when it is really a matter of substance.

The Elusive Truth about the Still Amazing 401(k)

Republican proposals to limit pre-tax contributions to employer sponsored 401(k) plans have been short on detail so far and, due in part to the complexity of tax rules, long on misunderstanding.

The annual limit on tax-advantaged contributions to an employer sponsored plan 401(k) (assuming you are under age 50) is $18,000 in 2017. This limit is unlikely to go down as a result of the Republican tax proposal, despite what you may read about a drop to $2,400.

That's because the $18,000 is comprised of two types of contributions - regular pre-tax 401(k) contributions and so-called "Roth" after-tax contributions to a 401(k) plan. Under current law, you decide how much of the $18,000 limit you contribute to regular pre-tax 401(k) and how much you contribute to a Roth 401(k). Many employers have not made the Roth after-tax feature available to their employees, so many people, even financial writers seem to be unaware of it.

The author of this Washington Post article seems to be unaware of the distinction, not even mentioning Roth.

Don't confuse the "Roth" 401(k) that an employer sponsors with the "Roth" IRA that has been around a lot longer. You set up your own Roth IRA, not your employer and the dollar limit on contributions to a Roth IRA is only $5,500.

So, back to the tax proposal - it's really just a matter of Uncle Sam saying "Pay me now or pay me later."

There are important differences, which we's get to, but some people will be better off with the change.

If your tax rate when you retire is the same as the tax rate in the year that you saved, then there is no difference between the pre-tax 401(k) and a Roth 401(k).

For example, suppose I want to set aside $1,000 today in a pre-tax 401(k) account that earns interest for 15 years at 6% per year and my tax rate is 20%. My $1,000 account would grow to $2,400. After paying taxes of $480,  I would have $1,920 left to spend after withdrawal.

Now suppose instead that instead of putting all of that $1,000 in a regular pre-tax 401(k), I pay taxes at 20% today on that $1,000 which leaves me with $800 after taxes to put in a Roth. What happens? You guessed it - the $800 in the Roth account grows at the same 6% per year to $1,920 which is tax free.

For a lot of people, the Republican tax proposal has no impact on retirement saving!

But the real story is more complicated.

If you expect your tax rates to be lower in retirement, then you are better off in the pre-tax 401(k), not the Roth. If tax rates increase for everybody due to future tax law changes, then now is a good time to save more in the Roth.

And there is one more impact no one seems to talk about. Those who are financially well off and  looking for an upper hand on taxes are better off with the Roth. Why? Suppose a wealthy individual is in a 35% tax bracket both  this year and in retirement and saves $18,000 in a pretax 401(k) account that grows to $100,000 at retirement, is withdrawn and taxed at 35%, leaving $65,000 in spending money.

That same person could set aside $27,700 of salary today by paying taxes of $9,700 (35% of $27,700) and put the remaining $18,000 in a Roth 401(k) that grows to $100,000 at retirement in the same year as the previous example - but pay no taxes on the $100,000!

So, for anyone who is hitting the tax law limits on saving, changing to a Roth contribution has the same impact as increasing the tax law limits.

None of this highly technical analysis touches on the real life impact that could discourage saving by lower paid workers if this $2,400 limit is made law. But that story is more complicated than it sounds. Most 401(k) plans have automatic enrollment features these days. Low paid employees contributing by automatic enrollment to a 401(k) are not likely to change their minds and take action to stop making Roth contributions. And they might even end up contributing more effectively for retirement if they have saved the same dollar amount after tax that they would have pre-tax, but their Roth account is not taxed when it is withdrawn at retirement.

That's the story from the worker's perspective. If you are well off, this change is not necessarily bad. If you are low paid, it's probably not bad because automatic enrollment will keep you saving for retirement. But from the perspective of the country, this proposal increases tax revenues today by removing future sources of  tax revenue.  This is yet another Republican tax policy slight of hand - eliminate the estate tax and reduce corporate taxes, offset those tax revenue reductions with a measure that increases current tax receipts, but blow up the deficit in the future. Let's forget about tomorrow cuz tomorrow never comes.

Ironically, DJT may have been told something about the 401(k) proposal that prompted the Oct. 23 tweet
"There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!"

As tweets go, that may not be far off the mark. But we will never know, will we?

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What Do Economists Say?

The American Economics Association recently held their annual meeting in Chicago. One session entitled "Nobels on Where is the World Economy Headed?" featured the following speakers and topics:
Presiding: Dominick Salvatore
Where in the World Is the World Headed? Angus Deaton
Seeking Political Keys for Economic Growth Roger Myerson
How the Left and Right Are Failing the West Edmund Phelps
Economic Risks Associated with Deep Change in Technology Robert J. Shiller
New Divisions in the World Economy Joseph E. Stiglitz

As you might expect, much of the discussion was wonkish, (for the nuggets, skip to final 12 minutes or so) but quite accessible to non-economists. With regard to the current swirl of events in the U.S., a couple of comments stood out. Edmund Phelps expresses many concerns, one of which is DJT's boosting of the prospects of specific corporations, such as Ford and Google," a type of corporatism not seen since the German and Italian economies of the 1930's." He is concerned the DJT administration "by expanding protection and interference in the business sector will block the innovation of outsiders more than innovation will be stimulated. Not content with the subtle reference to fascism he goes on to say "Hitler... by controlling the economy caused productivity growth to stagnate in the second half of the 1930s. Economists in the U.S. must wake up to the dangers presented by a return to corporatism. The new government...is threatening to drive a silver spike into the heart of innovation."
Speaking after Phelps, Robert Shiller envisioned a 100 year projection of what might happen, given new technologies. He expressed optimism - "Donald Trump doesn't matter. He'll only be here for 4 years", which prompted some laughs in the audience of economists.

Stiglitz mentioned that the panel shared a broad consensus on policies for the bottom 90% or bottom 50% that would work and policies that would not work, but that the kinds of policies that the president-elect has proposed are among the policies that will not work and he has not talked about the kind of policies that would work."

Myerson spoke positively about how "Constitutional democracy is sustained". "People who rise to the top...at lower levels developed a reputation for respecting the rules.." "When the people have a revulsion against ...the elites, they always bring in an outsider who looks a lot like Donald Trump. ", but that "we've just elected a president whose team has helped him to get around constitutional and legal norms for his own benefit." and "Once you are in the Oval Office, you have no particular incentive to change that part of your operation. That's the most dangerous thing and we need a strong Congress and ...strong state governments."

Angus Deaton said that economists tend to exaggerate the impact of the president on the economy. He expressed more concern about international politics especially in China where a lot of dangerous things are already happening and the "possibility of an accident is very large, potentially disasterous."

Stiglitz expressed concern about election of a president who says he wants to tear up international agreements and we in America thought we were setting an example for the rest of the world ...since WWII and DJT is a man who, "in his own business has shown an abuse of those kinds of things..is obviously very dangerous and will not elicit the kind of cooperation we need" and "Cooperation and trust is being eroded."

Myerson also worries that DJT will cause other governments to stop buying and holding U.S. debt.

In the Q&A that followed, the first questioner asked Shiller about not having to worry so much about Trump and his optimism that the next four years will be of little consequence. Shiller deflected the topic of pessimism to the other panelists, at which Phelps spoke up - "I gave you Hitler, isn't that enough.?"