HH: Kevin Hassett is the chairman on the Council of Economic Advisors. Dr. Hassett got his PhD from Penn. I’m trying to figure out how he was the research assistant to my old friend, Jim Poterba and Nancy Poterba at MIT. How can that be? Everybody knows everybody in Washington. But how could you have been Jim Poterba’s research assistant?
KH: Well, Jim Poterba was working on a paper with Alan Auerbach, who was my dissertation advisor at Penn, and so I worked on a paper for them back that year of grad school.
HH: It is very interesting.
KH: It’s a very small world.
HH: All economists know each other. What do most economists think of this tax plan?
KH: You know, I haven’t polled a lot of people, but I think that people who look at the literature are going to think that this is a big step forward for America, and especially for America’s workers.
HH: All right, Chairman Hassett, this is the key thing for me, the subchapter S pass-through corporation. I am one.
KH: You are.
HH: You’re talking to a subchapter S corporation. I have been since 1989. But I had this conversation with Paul Ryan last week. Will Americans be stunned to learn that LeBron James, who is a subchapter S corporation, I assume, is getting a big tax cut under this? And why is that a good idea?
KH: You know, I don’t think that they’re going to find that at all. And Secretary Mnuchin has this massive team of tax lawyers and tax economists that are trying to create rules that allow for a lower rate on small businesses, you know, the entrepreneurs that are driving growth in this country, while putting guardrails up so that LeBron doesn’t abuse it and turn his labor income into business income and get a lower rate.
HH: But doesn’t everyone seek to avoid taxes legally? I do, and you do, and probably LeBron James does, and Paul Ryan brought up Aaron Rodgers. Don’t we expect people to be able to conform their legal structure to whatever it is that you pass?
KH: Oh, you should absolutely do that. And I know that I’m sure you do that.
HH: You bet.
KH: You put, you know, whatever the guardrails are, you adhere to them. You know, for me, my own little story on that is that despite being a Republican all these years, I’ve never been audited. And I’m sure it’s the tax people look at my taxes and they say…
HH: Knock on wood.
KH: …There is a guy who is not taking advantage of anything. I can’t believe how much tax he’s paying.
HH: I’ve always believed I haven’t been audited, because I’m a Presbyterian. And that’s, I shouldn’t tell anyone that. I put Presbyterian on there. I give to both the Presbyterians and the Catholics so they consider I’m confused, but knock on wood. Let me talk to you, though, about the idea of subchapter S getting all that money. What do you expect them to do if they go from 39.6 to 25%, and you’re a car dealer, you’re a lawyer, you’re an accountant. What are they going to do with that money?
KH: Right. Well, what they’re going to do is they’re going to hire more workers, and have more profit, which they will share with their workers. You know, one of the…
HH: I’m not going to give Duane anything. He’s my producer. Nothing.
KH: No, no, Duane deserves it. Look, he needs more money for clothing. I can tell. (Fact check: True)
DP: Did I ever say you’re my favorite chairman of the Council on Economic Advisors?
KH: Well, you know, the fact is that there’s some big literature that shows that when businesses do well, that business owners like to share it with their workers. And so I know…
HH: Is that true?
KH: It’s really true. And the latest study, what they did is they found people got patents, businesses got patents, and then the patent is worth something, and then they look to see what happened to workers’ wages after the patent arrived at the firm, and they found that about 30% of the value of patents went into the wages of the workers at the firm.
HH: Now Chairman Hassett, has the stock market priced in this tax cut already? Is that why we have the near $6 trillion dollar increase that President Trump talks about?
KH: Well, I think what the market does is it looks ahead to future policy, and then, you know, factors in odds that something good happens. I don’t know exactly what the odds are, but if the market thought there was a 50% chance that the tax bill would happen, then it would go up a lot. But then if the tax bill failed, it would go down a lot. And I’m sure that you would see something like that happen if the tax bill were to fail.
HH: Yeah, that’s what I just about to get to. It is a risky proposition right now. If this tax bill hits a loop, the Senators are going to be responsible for a huge reduction in people’s personal wealth. Do you agree or disagree?
KH: Oh, I think they sure could be. And the fact is you know, much more important than that, I think, is that they’re going to maintain the status quo, which is a world where people, ordinary people’s wages are just not going up, and their wages are not going up because we’re encouraging our firms, we offer them a much lower rate if they just give jobs to people in other countries. And so this offshoring model is something that’s really been part of the American tax code for as long as I’ve been studying it, and we’ve got to change it, because everybody else has. And so right now, if you’re a firm, you don’t want to be in the U.S, because the tax is too high. You want to be in Ireland or some other place. And the Irish workers are the ones who are benefitting from it.
HH: Is there a repatriation rate, a special window to bring stranded corporate profits home that will close after a period of time in any version you’ve seen? And ought there to be?
KH: You know, that’s something that’s being worked out, but it’s, you know, something like we charge you 10% of the money that you’ve got parked offshore, and then you can do what you want after that, you know, that kind of a deal. But I don’t if 10% is the right number.
HH: That would be enormous.
KH: But you know, there’s something like, there’s, some, you know, ticket home fee that they’re negotiating, and then once you’ve paid it, then you can leave it offshore if you want, or you can bring it home. But with a 20% rate here, everybody’s going to want to bring it home, and that means there’s going to be higher demand for U.S. workers, and wages are going to go up. You know, the people who say that’s not going to happen are really in science denial, right? They’re saying well, how could the demand for something go up and then the price doesn’t change? You know, that’s what some on the left that oppose this bill are saying, and it’s just not economically literate.
HH: Can we hit 4% growth, I mean, really hit 4% growth?
KH: You know, for a short amount of time, you sure could. But you know, in the end, things like population growth and productivity growth are boundaries on how far growth can go. And so in the short run, it could possibly happen, but it’s not something you would want to guarantee as an economist.
HH: One minute left. Ben Bernanke is worried, according to Robert Samuelson yesterday, we don’t have enough inflation. Do you think we have enough inflation right now, Chairman Hassett?
KH: Well, I think that inflation is something that the Federal Reserve has to keep an eye on, and they’ve got their targets. I think we’re a little bit below their target, but I respect the independence of the Fed and wouldn’t give them advice about that.
HH: All right. Chairman Hassett, thank you for joining me.
KH: Maybe in a bar.
HH: Are you an optimist about getting this bill through?
KH: I guess I am an optimist. Yes, I certainly am, because I think if you look at the substance of it, then any patriot should support them.
HH: Chairman Kevin Hassett from the Council on Economic Advisors, thank you for joining me.
KH: Thanks, Hugh, great to be here.
HH: And hello to Jim Poterba. I hope you’re listening, Jim.
End of interview.