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Friday, November 1, 2019

What Would You Do?

Two news items today come together in a major way to bring up the question:  what would you do?  The two items are the release by Elizabeth Warren of her plan to enact Medicare For All and to finance the resulting huge cost, and the disclosure that President Trump has changed his legal place of residence from New York City to Florida.

Let's start with Warren's fantasy plan.  She actually contends that not only will her plan reduce total costs for healthcare, but that the plan more than covers the costs of the federal government to pay for Medicare for All.  Simply put, this is a lie, but I digress.  Let's get back to "what would you do?"

The first piece of Warren's plan I want to cover consists of her proposal to return the rate of corporate taxes on American firms to 35% from the current 21% rate and also to tax American firms on profits made overseas by 35% less a credit for taxes paid in other countries.  In other words, an American company that made 100 million dollars in profits in France would pay 28% to the French government and then 7% to the US government (to bring it up to 35%).  Let's look at this by itself.  We need to remember that during the Obama years when we had the 35% tax rate (which is the highest among developed countries in the world) and no worldwide taxes unless cash was brought back to the USA, we had a major problem of companies leaving the USA.  For example, Seagate Technology moved from Cupertino California to Dublin Ireland when Obama was president.  That move didn't change Seagate's taxes on operations in the USA, but it meant that profits worldwide were only taxed at Irish rates of, at most, 12.5%.  For a multinational like Seagate, that was a huge tax savings. 

Just imagine a company that has profits of $3 billion per year with one half coming in the USA and the other half coming abroad.  Suppose you were the CEO and you could save around 20% in taxes on that half of your profit by moving your firm from the USA to Ireland (and it could be less elsewhere) once Warren's plan was passed.  What would you do?  Would you keep the company in Dallas, or would you move to Dublin?  Would you keep your company in Atlanta or would you move to Bermuda?  Remember, the main office wouldn't need to move, just the legal domicile.  Remember also, that you would have at least two months after the election to make a move before Warren would be in office.  So I say again, what would you do if you were the CEO?

The answer is easy.  You would move your company.  So imagine that just half of the large multinational firms moved out of the USA.  Imagine how many jobs would be lost.  Imagine how many tax dollars would be lost.  Warren's plan assumes that no one reacts to her huge hike in corporate taxes and their imposition worldwide.  Only a fool would believe that.

And how about a second question on this point.  Imagine that you are the head of a large multinational corporation like Toyota.  You have billions of dollars of sales in the USA, and Warren's new higher 35% tax hits your profits on those sales.  Now you have a choice whether to build a new plant in Memphis or in Juarez, Mexico.  By putting the plant in Mexico, you can avoid US taxes on, let's say, $2 billion per year.  That saves taxes of $100 million each year.  If you were the head of Toyota what would you do?  Would you put the plant in Mexico or Tennessee? 

Here too, the answer is obvious.  Many new plants would go to other countries rather than the USA.  No sane company would choose to pay much higher taxes in the USA if it could pay lower taxes elsewhere.

Put all this together, and Warren's plan would mean a resumption of companies and JOBS leaving the USA.  It would mean much slower growth of the US economy.  It would be an economic disaster.  We've seen the faster growth achieved under Trump.  Would anyone choose to go back to stagnation or recession like we had under Obama -- except Warren's plans would be worse than anything Obama did.

There's a second piece of Warren's plan, though that has to be considered.  Warren wants a wealth tax of 6% on the assets of those who are worth more than a billion dollars.  She also want capital gains on stocks and bonds to be taxed annually by being marked to market.  Now consider that you are one of the few people who are worth more than a billion dollars and that you saw Elizabeth Warren becoming president.  What would you do?  President Trump just moved to Florida from New York to avoid the 13% or so in state and local taxes in New York City, and those taxes are just on income, not wealth.  Imagine you had a net worth of six billion dollars and that Warren's new law would tax you at $300 million per year.  What would you do?

That answer is also simple.  Many of the billionaires would move out of the USA.  Others would try to put their money into assets that could be valued a lower prices so as to avoid taxes.  Wouldn't it make sense to move to London or Toronto or Sydney or elsewhere if you could avoid $300 million in taxes each year? 

In addition, wouldn't you sell your stocks and bonds in order to avoid the mark to market provision and the resulting capital gains and wealth taxes?  Sure you would.  It would be a tax reduction of hundreds of more millions of dollars per year.  The net effect would be two-fold.  First, all those dollars that Warren claims she would realize from her high taxes would not materialize, thus leaving a major shortfall.  Second, the huge amount of stock being sold by billionaires would crush the stock market.  Middle class people across America who are counting on their 401Ks and pension plans for savings would see the value of their holdings collapse.  It could be again like the 1929 stock market crash (and we know what followed that:  the Great Depression).

These are not difficult questions.  Just ask yourself what would you do in these situations.  The answer is one that Warren and her fantasy plan won't like.  Warren says that "experts" support her plan.  Maybe these people think in the faculty lounge at some college that this stuff works, but in the real world, it would be a disaster, and it would be one that would crush the American economy.

There are many more problems with Warren's plan.  She is going to reimburse doctors at current Medicare rates even though those rates won't support the doctors' practices.  She is also going to reimburse hospitals at something that even Warren puts at current costs.  That would mean no profits for the hospitals, no cash to be used for future investments, no improvements for future treatment requirements, and basically no way for the hospitals to survive.  And there's more.  I'll leave those for another article.  Just keep asking yourself, though, what would you do?

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