First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 44 | Bob Stein | Tariffs, Taxes, and Trade: Decoding the New Administration | ROI Podcast
Bob Stein provides perspective on likely economic outcomes that may result from the evolving policy mix of the new Trump Administration. Plus…Bob shares an early peak at potential contenders for the 2028 US Presidential election.
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Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Isakainen, etf strategist at First Trust. Today, I'm joined by Bob Stein, deputy Chief Economist at First Trust. Bob and I are going to talk about the economy and what he expects in the year ahead. We're going to talk about tariffs and tax rates. We're going to talk about what he thinks might happen in 2028, as we have a new presidential election cycle starting very soon. Thanks for joining us on this episode. So, bob, last time you joined us on the First Trust ROI podcast was right before election day and you had some forecasts that were pretty interesting. Some were a little bit outside of consensus, some were. You know, consensus had kind of come in your direction, I would say. So you got a lot right. Congratulations on your forecasting ability. What surprised you most?
Bob:Well, I got 49 of the 50 states for Trump. The one I missed was Michigan. So I was surprised by two things. Number one obviously he won Michigan. So I was surprised by two things. Number one obviously he won Michigan. So he did even better than I thought he would.
Bob:And I was surprised by how well he did in the popular vote nationwide.
Bob:I thought it would be really close, maybe Harris winning by a half point to maybe one percentage point in the popular vote.
Bob:But then Trump, from that situation in that scenario, easily went in the Electoral College. But the fact that he won the popular vote outright by a percentage and a half was a bit of a surprise. And within that I was most surprised by not by his increase in minority support, which a lot of people saw coming and I did as well, but by his increase in youthful support, especially among Gen Z. They're much different than the millennials who kind of really took to Obama and the Democratic Party. I think a lot of people who lived through COVID and Generation Z and the shutdowns and all the draconian measures that were taken in excess, with the extra masking, as well as seeing what happened on the news the previous four years, kind of gravitated to the position that experts generally don't know what they're talking about, and as the Democratic Party is largely the party of the academic class and the self-described expert class, they were kind of repelled by that as well.
Ryan:What degree do you think the new forms of media, social media, podcasts. How did they contribute? Do you think they were a big? I mean, it seems to me that they contributed a lot but you know, maybe I have a podcast so I try to put too much importance on that.
Bob:Exactly A little self-dealing there right.
Bob:So I think it's a big issue, and it's especially an issue for the Democratic Party, or a problem for the Democratic Party relative to the Republican Party, because podcasts like this one right now it's not scripted, I don't have a script, I don't have any paper in front of me, you're just asking me questions and I'm free forming it right, and so it favors people who are willing and able to free form over people who have a 30 second segment. And so the classic difference I see is with Trump going on Rogan and talking for what? Two and a half three hours To the point of tiredness. I mean, that's why Rogan does it. He wants his guests to get mentally tired, and so they are willing to speak more freely, more with their id and less with their superego. If you take a Freudian perspective on the show, on 60 Minutes they interview Vice President Harris and slice and dice her answers afterwards so they sound great. Well, I've heard one commentator say this and I don't know if this fits right, but a podcast inherently is a very masculine enterprise. You're taking a lot of risk with it.
Bob:A scripted scenario where things can be spliced and diced to show you exactly what the purveyor wants to show you. It's a more feminine way of going about an interview, which is not to say one is right or one is wrong, or one is better or one is worse. But it used to be that almost everything came through the scripted scenario, with slicing and dicing by editors who favored one political side. That's a scenario that favors Democrats. Vice President Harris wasn't even willing to go on the Rogan show.
Bob:Now I suspect that other people would be willing to go on, like Gavin Newsom. I think he'd be eager to go on and deal with it. I think there are women on the Democratic side who might be eager to go on a podcast and mix it up like that. So this is not uniquely Democrat versus Republican, but I do think right now the Democrats gravitate towards scripted, sliced and diced, heavily edited media and that media is dying. And the podcasts and the Internet and authenticity and being able to extemporaneously talk about politics and policy issues. That media is growing. Now there is a Democratic candidate who would do exceptionally well in the new media enterprise and I've just talked about him recently.
Ryan:I know what you're going to say Stephen A Smith.
Bob:He could talk off the top of his head about pretty much any issue, kind of like Donald Trump did in 2015 when he would call into the media shows and let CNN and MSNBC Morning, joe and Micah take it away and he would just talk for as long as they wanted him on the show. Stephen A Smith can do that. I think he's a much more formidable candidate potentially on the Democratic side than many Democratic elites are giving him credit for.
Ryan:What percentage possibility do you think you would put on him today to be the candidate in 2028 for the Democrats? 6.1 percent, ryan. 6.1? Okay, I'll mark that down. We're going to hold you to 6.1. About 6 percent give or take. Okay. Well, I think that's higher than most people would say.
Bob:To put that in perspective. I think the most likely Democratic candidate is Gavin Newsom, but I'd only give him a 15% chance. So the gap between a Stephen A Smith or an AOC or a Gretchen Whitmer or a Pete Buttigieg and the top guy on the Democratic side very, very small. On the Republican side it's very different. So on the Republican side I would say JD Vance has a 65% chance of being the nominee. That high okay, everybody else combined. And if you look at the prediction markets, I think Coliseum is around 45%. So I'm definitely taking the over on JD Vance. And if I were a gambling man I would do that and, as you know, I am a gambling man, so I would take the over on JD Vance. Everybody else combined 35%, including players to be named later, you know Mike Pompeo, nicky Hayes, everybody, everybody you could imagine.
Ryan:Why do you think it's so high? Why do you give him 65%?
Bob:For JD Vance? Yeah, because all he has to do is stay in Trump's good graces and be in the public eye, generate very high name recognition and if he can kind of inherit the MAGA mantle without necessarily being Trump himself, I think he could win the Republican nomination even more forcefully than Trump did originally in 2016. Because I think he is a more generally a disciplined politician than Trump was and could avoid some of the mistakes that Trump made along the way in 2016 in alienating people he didn't necessarily have to alienate.
Ryan:So this is probably asking going down that rabbit hole too far, but who do you think would be a good VP pick for JD?
Bob:I think JD JD Vance has already decided who his VP pick would be if he were to get the nomination.
Bob:And when I say he has decided, he's decided who he wants to pick, not who he will pick, because there might be political constraints that arise over the next three and a half years that restrain him from picking that particular person, but I think he wants Marco Rubio. I heard there you know they're decently close personal friends JD Vance went to bat for Marco Rubio getting the Secretary of State position appointed by President Trump. Marco Rubio would kind of solidify the Republican realignment or the realignment among Hispanic voters toward the Republican Party. He's very well spoken on the issues.
Bob:He's somewhat elegant, eloquent, elegant well, it would be appropriate, but I think he's known a little bit more for it, for his eloququence, and he would also be a slight reaching out to the more establishment wing of the Republican Party, without alienating MAGA people, because if Rubio stays in Trump's good graces for two or four years before he eventually departs, it would be a more seamless transition. Now again, there are other people that Vance would consider, but I think that's the person he wants to be able to pick the most.
Ryan:So you don't think Don Jr or Eric Trump have a chance to throw their hat in the ring and extend the chip ring.
Bob:I think there'll be some lip service, but in the end they won't quite make the cut. The other thing is that if there's anything that's really proven on the Republican side about picking a female candidate to be president or vice president, I mean you have Donald Trump, and JD Vance are not exactly who you would devise in a lab to appeal to women, to women voters or female voters and yet they won the popular vote by a percentage point and a half. That ticket, the Trump vans ticket, won the popular vote by a percentage and a half against a female vice president I'm sorry, a female presidential candidate on the Democratic side, right. So if there's any lesson from that, it's the Republicans don't necessarily have to pick a female candidate in order to win or even to beat a female candidate.
Ryan:So another thing that you said last year you called the federal budget the most reckless of your lifetime and lots of deficit spending. The Trump administration has talked about dealing with some of that spending, curtailing it, making things more efficient. How optimistic are you about the ability of the new administration to actually come up with a budget that's more sound and even to reduce the growth of spending? But I mean, I don't know if they're going to reduce spending on an absolute level.
Bob:I think it's going to be a stretch to reduce the dollar amount of spending on an absolute level. Stretch to reduce the dollar amount of spending on an absolute level. And the reason is because so much of it is completely out of control from Congress and the president. With legislation. You have Social Security and entitlement it's baked in the cake because you know how many retirees there are, you know death rates and everything like that. Medicare baked in the cake, and healthcare generally improves over time with innovation, and so there are products and services available that weren't available 10 or 20 or 30 years ago. Medicaid even if they reform it, it's not going to save money in the short run. It'll save money on the back end in the long run.
Bob:Then you have interest on the national debt. Then you have national defense and I think in a multipolar world, which is the world where we've been easing into over the past couple of decades and is only going to become more multipolar, that calls for more defense spending and more military spending. So if you take those five categories, that's 85% or so of federal spending. You're only talking about the other 15%, which is social, discretionary spending, and I do think that will probably end up being lower on an absolute basis, but not a ton lower. It's not going to fall 50% or anything like that. I think at most that's going to fall 10%.
Bob:At most they are going to cut back some agencies In addition to USAID. They're going to cut back on the education department because the president is going to assert his dominion over the employees. Congress can pass all the laws they want, saying such and such must be done and such and such else must be done, and you have to have somebody doing it done and you have to have somebody doing it. But if the president is in charge of the executive branch and he decides not to hire the person to do X, y and Z who supposedly had money appropriated for them to do X, y and Z at the education department or some other agency, well then it doesn't get done because the president controls the executive branch himself and he's going to assert more authority in that regard probably than any Republican president in the modern era.
Ryan:So one of the things that the Trump administration has done was offer basically voluntary layoffs to a lot of the federal workforce, and I'm not sure where we stand with that today, but a significant degree of, or a significant number of people have taken that. Not as many as they thought, maybe, and I'm not sure how many people have been laid off more proactively, but I guess, from your perspective, how does that impact the unemployment picture in the US, and is that something that's enough to push the economy into a recession? What's the impact on the economy?
Bob:I don't think that's going to have a significant macroeconomic impact, and I say that fully recognizing that it has a big impact on the individual lives of the people who are laid off Absolutely.
Bob:But does it have a macroeconomic impact over and above, say, the reduction in spending that the federal government does?
Bob:And I would say no, no, like in my area where I live in northern Virginia. It may, but country as a whole not so much. We have to recognize, if you look at the JOLTS report that comes out from the Labor Department, every month in a typical year not a month, but in a full year the private sector in the US lays off about 20 million people and many of those people, the vast majority of them, go on to get a job elsewhere. That's 20 million people each and every year. In a good economic environment, 20 million people get laid off. These people do not get their sob stories on 60 Minutes or on the nightly news, the way that somebody who is sitting at a desk in the federal government does, whether it's USAID or elsewhere, which is kind of amazing to me how self-absorbed this old media complex is with federal employment relative to private employment, where people are being laid off literally all the time in a normal year in a north 20 million people laid off in a normal year.
Ryan:I'm not counting quits so if it's like 200,000 federal employees, I've seen numbers that suggest maybe it'll be 200,000. In the context of 20 million, that's 1%. Yeah, it's 1% of the total. Yeah, seems smaller when you put it that way.
Bob:Yeah, it certainly does. Remember you just look at the initial unemployment claims every week. Okay, these are not people who quit because you're not supposed to file a claim if you quit. These are people who were laid off, discharged and haven't found a new job yet. So $200,000 a week and that's not all inclusive of everybody who's laid off, because some people are laid off, find a new job right away or decide to do something else with their time. So that's $200,000 a week, largely in the private sector. So it matters, but from a macroeconomic perspective it's really a drop in the bucket. I do think long term there is a benefit to taking people who are otherwise employed by the federal government, unproductively or otherwise employed by some sort of non-governmental organization that was receiving very large subsidies from the federal government, who are other, who are otherwise engaged in unproductive or under productive invent endeavors, who are now going to be operating in the private hopefully for-profit sector, producing things that people actually want to buy for a price they're willing to pay.
Ryan:So that could actually, in the long term, boost economic growth, maybe even boost the standard of living of those people that are now doing something that's more productive.
Bob:It enhances productivity absolutely.
Ryan:So what do you think about Elon Musk's involvement in Doge? That's another thing that seems to be a big controversy. You know somebody who's appointed by the president and you know, obviously he's become a polarizing figure, which is kind of surprising in some sense, because you know he's a guy that seems like appeals to a lot of what the left likes in terms of electric vehicles, in terms of some of the other things that he has done historically. So maybe there's a lot in that question. But what do you think of what he's doing at Doge? Is he gonna be successful? And some of it's what we've been talking about.
Bob:The first thing I'd like to bring up is that it's really interesting how he is now a point of even physical attack for the left in the USA right now, to the point where he has some of his cars burned at dealerships and destroyed. People are keying his cars, cursing at people who are driving Teslas around. And here's somebody, elon Musk, who has developed the most successful US entrepreneur in green automobiles and electric automobiles, and it appears that to the left, who you would have thought would be all in on fighting climate change, it actually seems to be more important to them to get the subsidies that their groups were getting or that maybe other groups were getting, and that they're upset that those other groups aren't getting and those government jobs, than it is to fight climate change. They would rather hurt the guy who's trying to prevent climate change and reduce carbon emissions if it means that they could keep their subsidies for their non-governmental organizations, and it calls into question whether they actually believe all that stuff about climate change if it's more important for them to support groups that are getting government money and living on the government dole what I call basically these NGOs.
Bob:To me, in many respects, not all of them many of them do very good work and are not how I'm about to describe it. Some of them appear to be like the updated version of a welfare king or queen, where they are basically living off the government dole, but they're not living off the government dole at subsistence, which is where the welfare payments used to be. They're in an office and they're making hundreds of thousands of dollars a year, well more than the typical American basically making money off the government, and the protesters don't like Musk because he's getting rid of that. That's more important than climate change, Really, okay, I see what you think of climate change. Maybe you don't believe your own rhetoric which is not to say it's wrong.
Ryan:But it reveals their priorities.
Bob:It does, and I do think he's been very good about pursuing two things. Number one, the spending cuts and going after the agencies that are much more deeply entrenched with non-governmental organizations. Which brings me to another thing that I think he's trying to pursue, and not just spending cuts. I think he's trying to dismantle what he believes to be the ecosystem of the political left in the USA, where there are these ties between the government, non-governmental organizations living off of taxpayer money to run around the world or the US as do-gooders doing essentially secular Christian missionary work, and the media as well, and there's this kind of iron triangle, if you will, as well as the lobbyists, the law firms who support the NGOs, and he's trying to break up their networks by literally putting them out of jobs, literally taking their money away and making them leave behind their work and enter the for-profit sector of the US economy. And I think, if you see it as not just a measure to reduce spending but to change the institutional structure of American politics, what he's doing makes a lot more sense.
Ryan:You know there's a theory that's floating around. Interest rates are clearly important to Trump. You know he's a real estate developer and obviously real estate and interest rates they're closely linked. And he's been very outspoken in suggesting that he thinks rates should come down. And there's a theory floating around that he wants to actually tip the economy into a recession in order to bring rates down because he wants lower interest rates. Is that valid at all?
Bob:I think it's utterly ridiculous, and here's why. Yes, if there is a recession, interest rates will come down, including on US Treasury securities. However, the interest that the government has to pay on previously issued debt would not change at all At all. Okay, so almost all those payments would be exactly the same. Maybe the inflation index, the payment, would change slightly slightly, but in real terms it really wouldn't. So it wouldn't save us any money on the debt that's already issued. That would remain outstanding over and beyond this recessionary period.
Bob:In the meantime, remember that interest on the national debt is only about 3% of GDP. Okay, but we spend well more than 20% of GDP. So interest on the national debt, it might be like you know, something like 15% of federal spending, which means the other 85% is not interest. If we have a recession, revenue will fall relative to what it would otherwise be. That makes all those other spending commitments, not the interest, which might go down gradually over several years, gradually, but that other 85% of spending. Well, that's harder to finance now and the deficit would expand, which means you would add to the debt on a permanent basis. So if that's what they're thinking, they're crazy.
Bob:You would never want to tip so it'd be counterproductive is what you're saying yeah, you would never want to tip the economy into a recession to help you finance the national debt. That just would not make sense. Now there's another related question, which is do they understand that some of their policies in the short run might end up tipping the US economy into recession? Yes, absolutely, 100%. Do they want a recession? No, 100% against. Whether it helps the US finance some of its future debt or not, you wouldn't want a recession. Some of its future debt or not, you wouldn't want a recession.
Ryan:So they're willing to take some short-term pain, even if it causes an economic recession, because they believe that on the other side of that, it would create a higher level of economic growth and prosperity.
Bob:Which is exactly what happened in the 1980s, 81, 82, brutal economy. Now that in part was because Paul Volcker was the chairman of the Fed and Reagan inherited double-digit persistent, not transitory no one was saying transitory back then Persistent double-digit inflation and they had to bring it down. And because double-digit inflation had become had lasted so long during the 1970s that people assumed it would persist. It's tougher to bring inflation down when consumers don't believe you'll persist at a tighter monetary policy. You have to get even tighter than you would otherwise be. And so in 81 and 82, we had a brutal recession. Unemployment went up to 10 percent. We had a great economic recovery beyond that and, frankly, you know, if you include the Clinton expansion after that which would not have happened if he inherited very high inflation left over from the 80s, if you include that long 20 year period, it was a beautiful period for economic growth in the US and it was brought to be because of the tight monetary policy and the corrections to public policy that had to be made in 81 and 82.
Ryan:So you used to work as an official at the Treasury Department, right Correct?
Bob:So am I in trial here so.
Ryan:Mr Stein, how did they determine what the maturity of some of that treasury debt is going to be? How do they figure out like, okay, this is going to be five years, this is going to be 10 years, these are going to be T-bills? How does that process work?
Bob:Okay, so I was not deeply involved in that. I was on the macro economic side. We have debt managers who are deeply involved in that, including mostly civil servants, who really do know what they're doing in this regard, with one exception.
Bob:I'll get to that exception in a little while where I think they're completely wrong, but generally speaking, they know literally the date that all the Treasury securities that are outstanding are coming due. They also by working with the economic forecast that we in part did at the Treasury Department, the economic forecast that we in part did at the Treasury Department, as well as people who are experts on how that macroeconomic environment will translate into tax receipts and literally what day and what they expect tax receipts to be Like. There's literally a guy in there who will know this is what we expect literally every day. This is what we got.
Ryan:It's a big spreadsheet.
Bob:Oh, absolutely Massive spreadsheet, because all different sorts of revenue from different sources, whether it's withheld income tax, non-withheld payroll tax, revenue tariff, everything. They have expectations day by day based on historical patterns, day of the week, because certain payments are made. And they also have that with spending because they're working with the agencies for disbursement. That's why the Treasury Department was the key and Musk and Doge wanted to get into that system, so they can understand where is all the money going.
Bob:So they have expectations literally about spending and receipts of all kinds day by day. So they know what. They have an idea of what they expect the deficit to be going out months, and they can set their debt issuance by security type, based on when they have to roll things over and how the Lord how much deficit they need to finance. I guess a little dicey, or during periods when you're a budding, you know the deficit or the debt is a budding, the the legal limit and things have to change a little bit. But that's generally what I explained to you.
Bob:What they're doing here's where I think they're completely off base and this is more a combination of the civil servants and the political people which is that they don't really see the case for much longer debt issuance for the USA, and I have dating back to the time I was there. So I've always thought that we should start issuing maybe 100, maybe even perpetual debt. Perpetual debt doesn't mean it's outstanding forever. The government could always buy it back at market prices. But they're called consuls it's what the old British Empire used to issue and the idea would be to greatly lengthen the average maturity of the US debt, which is right now about five and a half years, which is not an unusual number by any stretch, but I'd like to substantially lengthen that to reduce our risk profile.
Bob:And I totally understand and this is the case that the debt managers would make to me and they'd talk to me slowly like I'm an idiot and, ryan, you've known me for many years, so maybe they're right, okay, but what they would say is listen, bob, normally the yield curve is upwardly sloping, so if we issue longer day-to-day on average, we're going to have to pay more interest on average and our national debt will be a little bit higher. And my response was always do you have term life insurance? I mean, you're not going to be unhappy if you never collect on that policy. You're going to be really happy because you're alive. But what is term life? You're not ripped off. My term life whether it's, I don't know, john Hancock or whomever else has AIG. I don't feel ripped off if that term life policy runs out. That's the best case scenario.
Ryan:Best case scenario it doesn policy runs out. That's the best case scenario. Best case scenario it doesn't pay out Exactly.
Bob:They aren't ripping me off, they're reducing risk. So I'm willing to pay a premium you get that word premium each and every year for a reduction in my family's risks, knowing that chances are I'll never collect. Well, I think taxpayers would be willing to pay a premium slightly higher average interest by year so that the debt complex of the USA was much less risky, because if it's spread out over hundreds of years, there's much less of a chance that you'll run into a problem refinancing the debt at any particular point in time.
Ryan:Okay, so here's a segue for you. Speaking of revenue to the federal government, let's talk about taxes. One of the biggest sources of uncertainty today has to do with tariff policies. It seems like there's a lot going on there and maybe it's difficult to interpret, because maybe they're being tariff policies are being used as a negotiation tactic and the Trump administration doesn't want to show their hand. But what's your opinion on what the Trump administration is trying to accomplish with tariff policies and do you think they're going to be successful?
Bob:there's any one thing that Donald Trump has consistently believed for the past 40 plus years is that the US is hurt by trade policy interaction with other country and that we need more protectionism in the USA. He has consistently it's the only thing he has consistently believed. So I think that he believes that tariffs would help the USA, that it would help raise revenue and it might do so slightly and fix the trade balance. I think he's right on the revenue side, but on the trade imbalance side, he's completely wrong. We do not have a trade imbalance because we're getting messed with by other countries and we cut too many free trade deals. We have a trade imbalance because the US is a fantastic place to invest relative to the rest of the world, and so people around the world send us their capital and because of that, american companies and American consumers can purchase more than they produce. So the question is is this sustainable? Can they keep on sending us? So the question is is this sustainable? Can they keep on sending us their money?
Bob:I actually think it is, and the reason is because, even though we are by far the world's biggest debtor, we owe the rest of the world a heck of a lot more than they owe us. The interest we pay or the returns we pay on their assets here are minimal, very low, compared to the returns we make on the investments we make abroad. So, even though we are the net debtor, every year when you look at the income flow, it comes in our direction. It's as if you owed me $100, ryan, and I owed you $50. You would be the net debtor, right. But what if the deal on the hundred dollars I owe you is that I have to pay you 10% interest per year and you have to pay me 30% interest on the $50 you owe me? I'm gonna debtor, but the income flow is in my favor.
Bob:Every year You're peppy. That's the situation the USA is in right now. So we're the net debtor, but we on net make more off of that exchange of assets and that, I think, is going to persist as long as we're the world's reserve currency and I expect that to continue. So as long as that persists, we can have those flows to our advantage, which means we can continue to run up debt that we owe the rest of the world and that means we can sustain these big trade deficits. If he raises tariffs consistently, it's going to lead to an appreciation of the dollar, and not every month there, every week okay, but generally lead to an appreciation of the dollar and that appreciation will wipe out the benefit he thinks there would be from reducing the trade deficit.
Ryan:So do you think that the Trump administration just doesn't understand the math that you just described for me?
Bob:I think there are people in the Trump administration who definitely understand it, but being a member of the administration sometimes requires a certain level of telling the boss that he's a genius and, oh, he's right, and people will just go along and do that.
Ryan:So you think the main purpose of the tariff policies is to sort of rebalance that trade imbalance as opposed to other? I guess what I'm getting with this question is it seems like it's somewhat linked with the big beautiful tax bill that Trump wants to pass, and I'm wondering if revenue from tariffs would be counted when the CBOs I don't think that's going to happen, ryan, and here's why.
Bob:If it's included in the bill, that means that you have to take discretion away from the president, and he wants the discretion to raise or potentially lower tariffs unilaterally. He doesn't want his discretion limited by Congress. So that tariff revenue is not going to be part of the tax bill. I don't think I would be surprised by that, ryan. So I don't think the increased revenue from tariffs is going to be associated with that tax bill in a way that reduces the net cost.
Ryan:So feel free to dodge this question if you don't have an opinion. But I was recently in Canada for work and everyone was talking about the Trump policies-related tariffs on Canadian goods. And Mexico is another one that the Trump administration has used tariffs as kind of putting them on, taking them off certain categories. It works, it doesn't. Do you have any opinion? What's going on there?
Bob:I don't have a strong opinion or an opinion that I'm very confident in. One theory I have is that his interaction with Canada and Mexico is designed to create chaos and a smokescreen, while what he's really doing and draw attention away from the fact that what he's really doing is raising tariffs on China. And so he'll talk about raising tariffs on Canada and Mexico and then back away. Yeah, but he'll slap another 10% on China that he doesn't back away from. So maybe he's creating a distraction politically. Okay, but that's above my pay grade. I don't know that. That's just a theory. Who?
Ryan:am I to say? A lot of people kind of guessing at what the ultimate objective is Now?
Bob:do I think it's all about fentanyl? I really doubt it. I'm not saying it isn't, but I lean against that. You think there's?
Ryan:something else happening, at least in addition to yeah?
Bob:part of me thinks that like, yeah, they want to enact this policy or talk about this policy vis-à-vis Canada. And then when Kevin Hassett, the head of the National Economic Council, is in the room, they go oh, kevin, this is not an economic measure, we're just doing this because of the fentanyl. And then he leaves the room and they all laugh and they go oh yeah, it's back to back to tariff. And then Kevin Hassett will go out in front of the cameras and say, oh, it's really about fentanyl, and as far as he knows it is, but he's not in the room when they make the certain key decisions.
Ryan:I think Okay, so later this year there will have to be a tax bill passed, because if there isn't a tax bill passed, then individual tax rates will go up next year.
Bob:Correct, they'll go back to where they were in 2017.
Ryan:So how do you think that this ends up playing out for individuals and for corporations Corporations? If I'm not mistaken that tax rate of 21% is a permanent rate, Correct? Yes, but Trump has talked about negotiating that as well. So where do you think we land?
Bob:So I think what's going to happen is we'll get a temporary extension of the tax cut, originally in Athens 2017, which itself was a temporary tax cut, not a permanent change in law and I think the temporary nature of it will go maybe five, six, seven years, and so we'll be back at it five, six or seven years from now, talking about this issue again. I do think there'll be some changes, though. I think the corporate rate will probably go down to 18 percent. He talked about 15 percent on the campaign trial. I think that's a bridge too far. There will be some sort of a limited tax relief for tips, but that issue has to be written really carefully because if they don't, it's a massive loophole in the US tax code.
Bob:I think the state and local tax deduction, which is near and dear to the hearts of California Republicans and New York Republicans and New Jersey Republicans, who will have to be included in voting for whatever tax credit extension happens, because the Republican majority in the House is so slender I think that SALT deduction goes up, probably to somewhere in the vicinity of $25,000. It may even go higher, but to go higher, I think they would have to pair it with a reduction or some limitation on the corporate SALT deduction, which back in 2017 they didn't do anything about, which is a little bit of a loophole Because, ultimately, whether the state and local tax deduction is taken by individuals or companies, it inures the benefit of some individual somewhere, whether an individual taxpayer who earns income or somebody who's clipping dividends or getting capital gains.
Ryan:So that SALT deduction was once unlimited, correct?
Bob:It used to be unlimited. Yes, prior to 2017, essentially unlimited.
Ryan:The reason that they can't make it unlimited again is because the math all has to work in terms of making tax cuts into the future somewhat revenue neutral. Is that how it has to be?
Bob:Well, it doesn't have to be revenue neutral. I mean, they could in theory make it unlimited again, but that would massively increase the cost, the scored cost, of that tax cut.
Ryan:OK.
Bob:And there's only a certain amount of tax cut the Republicans are willing to enact based on optics, because, remember, they have a slender House majority and so the key votes will come down to marginal members who are more moderate than the fringe folks. Key votes will come down to marginal members who are more moderate than the fringe folks, and so there's a certain optical level that some members in the House and Senate might be uncomfortable with Alicia Murkowski, susan Collins, tom Tillis, whomever and so they have to have a number that they agree with. And the more they use to uncap or raise that SALT deduction, and the more they use to uncap or raise that SALT deduction, that's tax relief that can't be applied for other reasons, like marginal tax rates or tax relief for tips or for some other form of tax relief. So I think, or the corporate cut down to 18, or maybe getting it to 15 percent if Trump has his way. So I think that there are limits.
Bob:The other thing is that, distributionally, once you get above that, once you get above 10,000, in fact, once you start at zero or any soft deduction, you're really helping upscale people. And just so that the people know at home, ryan, you are hailing from the state of New York, which is a high-tax state. It is very high-tax. I come from a moderate-tax state, the state of Virginia tax state. I come from a moderate tax state, the state of Virginia. So I would prefer to keep things the way they are or maybe reduce the state and local tax deduction.
Ryan:You obviously I say unlimited.
Bob:Yeah, of course you say unlimited.
Ryan:That's purely selfish reasons.
Bob:Not ideological at all. If I lived in New York, I would be saying the same damn thing.
Ryan:So why do you think five to seven years would be the extent? Is there an incentive from a political standpoint to want those tax rates to expire? Because then it gives you an issue to run on.
Bob:I don't think it's that, although that's true, it's described in Washington DC to some extent as a milker. What? Is a milker.
Ryan:A milker is like something's included in a DC to some extent as a milker, okay.
Bob:What is a milker? A milker is like something's included in a tax bill. It usually refers to something that's something minor that has to be renewed every year or two. Okay, like the R&D tax credit or something like that. It's a milker, which is that the lobbyists are totally fine with lobbying for a one or two-year extension, because then their client is going to have to keep them on retainer. To come back to the Ways and Means Committee and the Senate Finance Committee and beg those members to keep it going Was that a part of any of your courses at Georgetown Is that like?
Bob:you know, Milker 201 or something like that no.
Bob:Ryan, it's taught on the mean streets of Washington DC and it also from the members' perspective. It's great because it means the lobbyist is going to have to keep donating to your campaigns. Right, because if you're in the House, especially on the Ways and Means Committee, you're running every two years. So there's no better way to milk the process overall than to do this. Now I'm using milker in a slightly different way, which is to say that the Republican Party by doing this temporarily, they can scare the daylights out of people five, six, seven years from now by saying hey, if you don't vote for us, the Democrats are going to raise taxes across the board, including on you, so you better come out and vote for us.
Ryan:So it's a milker in a slightly different sense okay, but you don't think that that's the main reason why it's temper, or do you know?
Bob:I think the main reason is that they don't. In order to make it permanent, it has to be fully offset with, with, with spending cuts and that are enacted in law, not just doge going through the agencies, not just future president, president's, eliminating workforce, riffing workforce and stuff like that. It has to be legislated, and so unless you're doing stuff on entitlements, not Social Security, social Security campaign included, which, which are tough votes for Medicare, medicaid, things like that, or raising other taxes to offset it, you can't make it permanent, and so you're better off just doing it temporary and hoping to signal to businesses and consumers hey, we're going to keep this going. It's just going to take a little bit of work legislatively, but trust us, we're going to be there for you.
Ryan:The corporate tax rates were permanent. That were cut back in the first Trump administration. How is that different?
Bob:Because that portion was fully offset. Oh okay, they can only offset I'm using two opposing words they can only fully offset part of it. Oh okay, and so that was-. That segment that segment was was done separately.
Ryan:Okay to make it permanent and in order to you mentioned 18% as a number that maybe the corporate tax rate got to know it came down to 21, no, no, but so in the future? Under negotiation you said maybe they'd bring it down. He talked about 15, they'd bring it to 18. Would that have to be fully offset as well?
Bob:If they want to make it permanent. Yes, my guess is that's a portion they might make temporary, so they don't have to come up with.
Ryan:See, now that brings me back to the Milker theory, if that's what we're going to call it.
Bob:I mean, you can't out-cyic me about Washington DC, ryan, but Staying at 21%.
Ryan:If I'm a business, I like the certainty of 21%.
Bob:If it's permanent.
Ryan:Because then someone has to actually go in and raise taxes If I'm a business.
Bob:I would be more than happy to accept 18% for some period of time yeah, that's unknowable some unknowable period of time. If the most it would go back to once it were no longer 18, would be 21.
Ryan:Oh, okay, that's a good point so you've out-Washingtoned me again, bob. This is why we the deep insights from a former deep state operative.
Ryan:Okay, well, I'm looking at the clock. Here I have about two hours more worth of questions for you that we're not going to get to today. Why so little? We can't? You mentioned the Rogan method of trying to tire the guest out until they start to crack and give you their true opinions. We're not going to have a chance to do that today, but I do thank you for joining us on this episode and we'll have you back on real soon.
Bob:Delighted to be on Looking forward to the next time All right.
Ryan:Thanks, bob, and thank you to all of you for joining us on this episode of the First Trust ROI Podcast. We'll see you next time.
